Robust economic recovery in the 1950s and ’60s served to make Bretton Woods synonymous with visionary, cooperative international economic reform. Seven decades on, at a time of great global financial and economic stress, it is perhaps not surprising that blueprints for revamping the international monetary system from the likes of hedge fund guru George Soros, Nobel economist Joseph Stiglitz, and policy wonk Fred Bergsten all hark back to Bretton Woods, and the years of Keynes-White debate that defined it.
But can the story of Bretton Woods actually light the way?
To be sure, there were major flaws in the monetary framework that emerged from Bretton Woods, which contributed directly to its final collapse in 1971. Indeed, the life span of the Bretton Woods system was considerably shorter, and its operation more troubled, than is commonly reckoned.

They did not want the markets to have the ability to point out when monetary policy was incompatible with the exchange-rate target.
Establishing the Bretton Woods system evoked many of the arguments that still rage today. Graham favoured floating exchange rates, but that turned out to be a policy whose time had not yet come. His arguments (and those of laissez-faire economists like Friedrich Hayek and Ludwig von Mises) were to be taken up in the 1960s and 1970s by the Chicago economists Milton Friedman and Robert Lucas. The creation of the euro owes much to the feeling – prevalent at Bretton Woods – that exchange rates should be stable and speculation curbed. And the need to impose obligations on creditor and surplus nations is now an argument used by the Americans against the Chinese.
At heart, Bretton Woods was a system blessed by the Americans, at the time the world’s leading creditor.

…

This allowed the City of London to rise above the long-term economic decline of Britain and establish itself as one of the world’s great financial centres, a development that is still significant today.
The development of the Eurobond market was also an early sign of the international flows of capital that were eventually to help bring down the Bretton Woods system. Money was being transferred across borders and between currencies, and that meant it could switch out of currencies about which investors had doubts. After years of government control, the capital markets were slowly asserting their independence. Bretton Woods survived for just thirteen years after the first easing of capital flows.
However, governments played a bigger part in the killing of Bretton Woods than the private sector. Charles de Gaulle, the French President, had enjoyed an uneasy relationship with the American authorities during the Second World War; President Roosevelt had repeatedly attempted to sideline him in favour of less prickly generals.

…

Sure enough, within four days President Nixon had suspended the convertibility of gold, accompanying the move with a 10 per cent surcharge on imports – a blatant attempt to force other countries to revalue their currencies. The Bretton Woods system was over.
It could be argued that Bretton Woods was doomed by the attempt to combine fixed exchange rates with a full employment policy. Arguably these two aims were not compatible for all countries all the time. The switch to floating exchange rates in the 1970s was followed by much higher rates of unemployment than had occurred under Bretton Woods, and the monetarists were accused of being callous about the plight of the unemployed because of their obsession with inflation.
Another problem was that the system was insufficiently flexible. It was devised at a time when the US was dominant economically, politically and militarily; only the intellectual reputation of Keynes prevented the system from being completely designed in Washington.

It was only that, during the 1930s at any rate, a thinker and writer of real quality, in the form of John Maynard Keynes, had lent an intellectual respectability to them.
10
Bretton WoodsBretton Woods is a phrase which denotes an entire era in the monetary management of the world’s economy. If the inter-war period can be called the ‘age of Keynes’, the conference held at the affluent mountain resort town of Bretton Woods, in New Hampshire, was perhaps his most enduring practical legacy. Keynes, however, did not dominate the proceedings at Bretton Woods as much as he would have liked. The American delegation, under the direction of Harry Dexter White, was composed of tough, legally trained bureaucrats who would not be bamboozled by the world-famous Englishman. Of course, by 1944, when the Bretton Woods conference took place, Keynes was at the height of his prestige. The advent of the coalition government in 1940 had swept away Conservatives like Neville Chamberlain who remained rigorously attached to Peelite principles of balanced budgets.

…

The Agreement, in Boothby’s view, had shown with ‘startling clarity’ that an attempt had been made to ‘revert to the economic system of the nineteenth century’. The ‘Bretton Woods agreement would put us all back on a gold standard more rigid in some respects than has ever existed in the past’.14
This assessment may have owed much to the hyperbole of the political platform, but it hit on an aspect of the truth. Boothby admitted that Bretton Woods allowed sterling to devalue ‘up to 10 per cent’, but stated that Britain’s currency would now be ‘in the hands of an international authority, on which our competitors will have a majority vote, and which is to be located in the U.S.A.’.15 Although Keynes attempted to argue that Bretton Woods was not simply a reversion to the gold standard, he had to admit the link to gold. In a letter to the Economist, written in July 1944, he characterized the ‘old standard’ as ‘rigid’. The Bretton Woods regime, which he referred to as the ‘proposed standard’, would mean that ‘all currencies would have a “link” with gold, but it would be “flexible” enough to permit orderly changes in exchange rates’ in order to ‘avert the breakdown of monetary systems’.16 In May, Keynes had used his new position as a member of the British House of Lords to defend Bretton Woods against the charge that it was a return to the gold standard.

…

‘If there is one area in which spirits were not prepared for international co-operation, it is certainly in the monetary field,’ he wrote. This was because the ‘idea of money has always been allied to that of national sovereignty’.36 The wider significance of Bretton Woods was in its relative success as an effort of co-ordinated international statesmanship. Although it had the stamp of international co-operation, however, it was clear that no such co-operation could have been achieved without the preponderant power of the United States. Bretton Woods itself was a New Hampshire mountain resort. The institutions of Bretton Woods had been located in Washington, the capital of the dominant military and economic nation in the world. The dollar was the basis of the monetary system. Bretton Woods may have marked a turning point in international co-operation, but it was, at the same time, an emphatic symbol and proof of the hegemony of the United States.

Keynes and White realized that it was better to accept this and build the safety valves into the system than to ignore it and risk total collapse.
The Bretton Woods Model
The system they crafted came to be called the Bretton Woods regime, after the New Hampshire resort town at which Keynes, White, and other officials from forty-four nations met in July 1944 at a conference to draft the new rules. The Bretton Woods agreement was an amazing piece of institutional engineering. In about three weeks, Keynes and White supplied the world economy with a new economic philosophy and created two new international organizations: the International Monetary Fund and the World Bank. The deal struck at Bretton Woods would govern the world economy for the first three decades following World War II. Long after the regime became undone during the 1970s and 1980s, the term “Bretton Woods” would remain a wistful reminder of the possibilities of collective deliberation at the global level.

…

This signaled a momentous transformation in policy beliefs. We need to return to the original Bretton Woods agreement to appreciate its full significance.
The Bretton Woods Consensus on Capital Controls
It would be difficult to overstate the strength of the consensus in favor of capital controls in the immediate aftermath of World War II. As one American economist put it in 1946: “It is now highly respectable doctrine, in academic and banking circles alike, that a substantial measure of direct control over private capital movements, especially of the so-called ‘hot money’ varieties, will be desirable for most countries not only in the years immediately ahead but also in the long run as well.”11 The Bretton Woods arrangements fully reflected this consensus. As Keynes himself would make clear, the agreement gave every government the “explicit right to control all capital movements” on a permanent basis.

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Capital controls were effective through the 1960s, and they worked as the architects of the Bretton Woods regime imagined they would, opening up space for domestic macroeconomic management.14
The Achilles’ heel of the Bretton Woods regime was that it did not address a fundamental conundrum for the international economy: What will play the role of international money in the system? Sustaining a global economy requires a global medium of transaction and store of value—a “money”—that is made available in ample quantities when needed and can be reliably redeemed in exchange for real goods or assets. Gold played this role under the gold standard; we saw the problems that this gave rise to in the 1870s (when a global shortage of gold forced price deflation) and, fatally, in the 1930s. Under Bretton Woods, the U.S. dollar became effectively the “global currency,” serving as the reserve asset of choice for central banks around the world.

The basis was laid for the dollar crisis of August 1971 and the final abandonment of the Bretton Woods system.61
And just as the US Treasury had been central to the establishment of new forums and mechanisms for the international management of the “dollar crisis” within the Bretton Woods framework, so was it now central to that framework’s dismantling. This did not involve withdrawing from the multilateral management of the contradictions and tensions in the Bretton Woods institutions, but rather bringing into play—as the US inexorably moved towards breaking the dollar’s link to gold—all the links the Treasury and the Fed had developed with other states’ finance ministries and central banks. Inside the Treasury itself, the fate of Bretton Woods appeared to come to rest in the large hands of Paul Volcker. He had left the Treasury for three years to do the obligatory stint on Wall Street required of senior civil servants in the American state’s financial apparatus, and now, despite being a Democrat, he was recruited to take on the post of undersecretary of the Treasury for monetary affairs under Nixon, where from 1969 to 1971 Volcker “for all practical purposes was Treasury.”62
When in August 1971, after two years of trying to “muddle through,” the Nixon administration finally terminated the dollar’s link with gold, the decision was tentative and uncertain.

…

If there was ever a case where the advantages of relative autonomy were manifest, allowing a capitalist state to act on behalf of capital but not at its behest, it was in the extensive public campaign the US Treasury undertook to get the Bretton Woods agreement endorsed by Congress over the bankers’ opposition. In “one of the most elaborate and sophisticated campaigns ever conducted by a government agency in support of legislation,” the Treasury presented Bretton Woods as a “good business deal for the United States” as well as “the symbol for a new kind of cooperation.”50 The Treasury argued that Wall Street’s portrayal of the Fund as a vehicle for capital controls was substantially incorrect. Its official “backgrounder” to the Bretton Woods Agreement emphasized that it “would be incorrect to assume that most capital exports are prohibited under the Fund’s provisions” and that a “careful examination of the fund proposal will reveal that most capital exports can probably take place freely, and only in a minority of cases will exchange restrictions have to be imposed.”51 This was in fact the way the Treasury expected the Fund to operate—and the way it actually did.52
Even so, passage by Congress was not assured until the Treasury struck a last-minute agreement with the representatives of the American Bankers Association and leading Wall Street banks whereby the Treasury agreed to various amendments in a compromise Bill which set up mechanisms such as the National Advisory Council, to ensure that US representatives to the Fund would act in such a way as to impose greater conditionalities on governments that were given access to its resources.

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American State Capacities: From Great War to New Deal
From Wilson to Hoover: Isolationism Not
The Great Depression and the New Deal State
From New Deal to Grand Truce with Capital
PART II: THE PROJECT FOR A GLOBAL CAPITALISM
3. Planning the New American Empire
Internationalizing the New Deal
The Path to Bretton Woods
Laying the Domestic Foundations
4. Launching Global Capitalism
Evolving the Marshall Plan
The American Rescue of European Capitalism
“The Rest of the World”
PART III: THE TRANSITION TO GLOBAL CAPITALISM
5. The Contradictions of Success
Internationalizing Production
Internationalizing Finance
Detaching from Bretton Woods
6. Structural Power Through Crisis
Class, Profits, and Crisis
Transition through Crisis
Facing the Crisis Together
PART IV: THE REALIZATION OF GLOBAL CAPITALISM
7. Renewing Imperial Capacity
The Path to Discipline
The New Age of Finance
The Material Base of Empire
8.

In 1944, the New Dealers’ anxieties led to the famous Bretton Woods conference. The idea of designing a new global order was not so much grandiose as essential. At Bretton Woods a new monetary framework was designed, acknowledging the dollar’s centrality but also taking steps to create international shock absorbers in case the US economy wavered. It took fifteen years before the agreement could be fully implemented. During that preparatory phase, the United States had to put together the essential pieces of the jigsaw puzzle of the Global Plan, of which Bretton Woods was an important piece.
Bretton Woods
While the war was still raging in Europe and the Pacific, in July 1944, 730 delegates converged on the plush Mount Washington Hotel located in the New Hampshire town of Bretton Woods. Over three weeks of intensive negotiations, they hammered out the nature and institutions of the post-war global monetary order.

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The New Dealers, however respectful they might have been of John Maynard Keynes, had another plan: a Global Plan, according to which the dollar would effectively become the world currency and the United States would export goods and capital to Europe and Japan in return for direct investment and political patronage – a hegemony based on the direct financing of foreign capitalist centres in return for an American trade surplus with them.5
The rise of the fallen
The Global Plan started life as an attempt to kick-start international trade, create markets for US exports, and address the dearth of international investment by private US companies. But before long it had developed into something bigger and supposedly better.
To give Bretton Woods a strong backbone, the New Dealers were determined to support the dollar by creating, within the Bretton Woods fixed exchange system, at least two additional strong currencies that would act as shock absorbers in case the American economy took one of its many periodic downturns. The idea was to find ways to absorb such shocks until Washington managed to reverse the downturn in its own backyard. Without these supporting pillars, the Bretton Woods system, they feared, would be too precariously balanced.
However, strong currencies cannot be willed into existence. They must be underpinned by heavy industry, as well as by adjacent trade zones, a form of Lebensraum (or vital space) that provides the requisite demand for manufacturing products.

…

In a knee-jerk reaction, the stricken government, unable to increase public expenditure itself, will seek ways to ‘import’ demand from abroad. Keynes surmised that it would purposely violate the rules of the Bretton Woods system. Why? The ‘system’ requires that, in order to counter the tendency of the currency to fall during the debt–deflationary crisis, the government should use its dollar reserves to stabilize it within the original ±1 per cent band. But the government, desperate to increase exports as the only way to counter the recession, would have every incentive to do precisely the opposite – to hoard its dollar reserves and instead to approach the Bretton Woods system’s administrators, begging them to allow the currency to be devalued.
Box 3.1
Surplus recycling mechanisms: capitalism’s sine qua non
Surplus recycling is an integral component of any society that organizes production through the market.

Nixon, 1972
As World War II wound down, the major Allied economic powers, led by the United States and England, planned for a new world monetary order intended to avoid the mistakes of Versailles and the interwar period. These plans were given final shape at the Bretton Woods Conference held in New Hampshire in July 1944. The result was a set of rules, norms and institutions that shaped the international monetary system for the next three decades.
The Bretton Woods era, 1944 to 1973, while punctuated by several recessions, was on the whole a period of currency stability, low inflation, low unemployment, high growth and rising real incomes. This period was, in almost every respect, the opposite of the CWI period, 1921–1936. Under Bretton Woods, the international monetary system was anchored to gold through a U.S. dollar freely convertible into gold by trading partners at $35 per ounce and with other currencies indirectly anchored to gold through fixed exchange rates against the U.S. dollar.

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Since 1961, the United States and other leading economic powers had operated the London Gold Pool, essentially a price-fixing open market operation in which participants combined their gold and dollar reserve resources to maintain the market price of gold at the Bretton Woods parity of $35 per ounce. The Gold Pool included the United States, United Kingdom, Germany, France, Italy, Belgium, the Netherlands and Switzerland, with the United States providing 50 percent of the resources and the remainder divided among the other seven members. The pool was partly a response to an outbreak of panic buying of gold in 1960, which had temporarily driven the market price of gold up to $40 per ounce. The Gold Pool was both a buyer and a seller; it would buy on price dips and sell into rallies in order to maintain the $35 price. But by 1965 the pool was almost exclusively a seller.
The End of Bretton Woods
The public attack on the Bretton Woods system of a dominant dollar anchored to gold began even before the 1967 devaluation of sterling.

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Short-term lending to particular countries in the event of trade deficits would be provided by the International Monetary Fund. Countries could only devalue their currencies with IMF permission and that would generally be granted only in cases of persistent trade deficits accompanied by high inflation. Although conceived in the form of a grand international agreement, the Bretton Woods structure was dictated almost single-handedly by the United States at a time when U.S. military and economic power, relative to the rest of the world, was at a height not seen again until the fall of the Soviet Union in 1991.
Despite the persistence of Bretton Woods into the 1970s, the seeds of Currency War II were sown in the mid- to late 1960s. One can date the beginning of CWII from 1967, while its antecedents lie in the 1964 landslide election of Lyndon B. Johnson and his “guns and butter” platform. The guns referred to the war in Vietnam and the butter referred to the Great Society social programs, including the war on poverty.

In the post-1945 period, the separation of national economies was deepened
though the hegemony of the USA was established. Capital markets were heavily
regulated, exchange rates were fixed in the Bretton Woods framework and
convertibility of currencies was restored even among developed countries only by
1960. But thanks to Keynesian macro policies, cycles in each country were quite
mild. Depressions were replaced by recessions and sustained growth became the
norm rather than cyclical swings. It was only after convertibility had been
restored that the US excess spending during the later years of the 1960s spread
US inflation to other countries.7
As the economies began to be painfully reintegrated, the Bretton Woods system
failed. Exchange rates became variable. The quadrupling of oil prices in 1973 and
again a sharp rise in 1979 revived the business cycle.

…

Therefore the IMF was conceived as an institution to promote collective action in a government-run monetary system under the leadership of the US
government.
But the gist of the Bretton Woods monetary order was destroyed by sweeping
changes brought about by the surge in capital mobility that the US government
had intended to provide with a friendly climate. From the early 1970s onwards,
the international monetary system (IMS) has been altered decisively in becoming
market-led. The metamorphosis has brought more active players in the international arena and woven more channels of interdependence: competing currencies,
influential financial centers, the momentous common beliefs of financial
markets, the rising economic power of Asian countries. The complexity of such
a world was not foreseen in the Bretton Woods Agenda. The IMF has had to
adapt its doctrine and missions while keeping its identity.

…

Being in a position to rebuild the IMS entirely, the two Anglo-Saxon countries
had reached a compromise after a lengthy bilateral negotiation that no other country or cluster of countries was able to block. It is the reason why the Bretton
Woods Conference is unique and will remain so in the foreseeable future. All
prior world conferences failed anyhow: Paris in 1865, Genes in 1922 and London
in 1933. So did the grand design to overhaul the IMS launched after the
Smithsonian Institute Agreement in December 1971.
The IMS has evolved under the spur of market forces. It has never been
reformed. Indeed the IMF is not a political institution in its own right, capable of
spelling out and imposing a collective good over the confronting interests of its
members. As the dissemination of power makes world politics shift further away
from the configuration that had made Bretton Woods possible, a minimal political insight is recommended in studying the so-called new financial architecture.

To answer that question we need to change gears and take a moment to
discuss the current international monetary “system”—or at least what remains
of the 1944 Bretton Woods Agreement.
Back to Bretton Woods
In July 1944, 730 delegates from the 44 allied nations gathered at the Mount
Washington Hotel in Bretton Woods, New Hampshire, for the United Nations
Monetary and Financial Conference. The three-week conference resulted in the
signing of the Bretton Woods Agreement, a system of rules, institutions, and
procedures designed to regulate the international monetary system and thereby
avoid a repeat of the conﬂicting national policies that contributed to the Great
Depression of the 1930s.10 The chief features of the Bretton Woods system were
an agreement that each nation would adopt a monetary policy that maintained
the exchange rate of its currency within a ﬁxed value, and the use of the International Monetary Fund to temporarily bridge payment imbalances.

…

The three-week conference resulted in the
signing of the Bretton Woods Agreement, a system of rules, institutions, and
procedures designed to regulate the international monetary system and thereby
avoid a repeat of the conﬂicting national policies that contributed to the Great
Depression of the 1930s.10 The chief features of the Bretton Woods system were
an agreement that each nation would adopt a monetary policy that maintained
the exchange rate of its currency within a ﬁxed value, and the use of the International Monetary Fund to temporarily bridge payment imbalances.
The devil, as the saying goes, is in the details. While the intention of the original Bretton Woods Agreement was to establish a “pegged-rate” currency
regime based on the gold standard, in reality the delegates established a principle “reserve currency”—the U.S. dollar. Under this gentlemen’s agreement,
Washington promised to link the dollar to gold at the rate of $35 an ounce, and
other nations would then “peg” their currencies to the U.S. dollar. As such, the
original Bretton Woods Agreement (henceforth “Bretton Woods I”) directly
lashed the currencies of a re-emerging Europe and Japan to the U.S. dollar. This
meant the values of all other currencies were to be based on their dollar conversion rate.

…

That is, the
value of a currency was/is based upon international perceptions of a particular
nation’s economic strengths and weaknesses. In place of the “gold standard,” a
currency’s place on the monetary exchange market could ﬂuctuate based on economic, military, and political performance, at home and abroad.
This is not to say, however, that the fundamental economic principles underlying Bretton Woods had been buried and forgotten. In 2003, Michael Dooley,
David Folkerts-Landau, and Peter Garber released a paper titled, “An Essay on
the Revived Bretton Woods System.”15 According to the authors, the international economic and political system existent during Bretton Woods I is best
envisioned as consisting of a “core” and a “periphery.” The United States served
as the core, whereas Europe and Japan constituted an emerging periphery.
According to Dooley, Folkerts-Landau, and Garber, “the periphery countries
chose a development strategy of undervalued currencies, controls on capital
ﬂows, trade reserve accumulation, and the use of the [core] as a ﬁnancial intermediary that lent credibility to their own ﬁnancial systems.

Much of the assistance provided to Europe under the Marshall Plan, like the loans to Europe in WWI and WWII, were largely forgiven. The Bretton Woods Conference in July 1944 was organized, wrote Henry Hazlitt, because of the widespread existence of inflation. But rather than return to the gold standard or some other fixed discipline for maintaining the real value of global currencies, the Bretton Woods Agreement crafted by John Maynard Keynes and his contemporaries institutionalized global inflation under the aegis of the U.S. dollar. “And in spite of the mounting monetary chaos since then, the world’s political officeholders have never seriously reexamined the inflationist assumptions that guided the authors of the Bretton Woods agreements,” noted Hazlitt.24
One of the key measures of the global role of the dollar and inflation in helping to float the world economy after WWII was the growth of the offshore market in dollar deposits—the so-called “Eurodollars.”

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Time magazine wrote in 1971: “Welfare reform, cutbacks in defense spending, advocacy of deficit spending, and Keynesian economics were difficult enough for Nixon’s conservative supporters to tolerate, but for many, rapprochement with Communist China was the final straw.” But Nixon’s repudiation of Bretton Woods and devaluation of the dollar had far more significant impact on issues that conservatives hold dear, particularly the value of the dollar and the stability of the U.S. economy.
Under the Bretton Woods arrangement, gold and dollars had been established as the reserve for all of the nations outside the Communist sphere. Since in the 1940s there was not sufficient gold to underpin global trade and financial flows except in a fractional way, Keynes and the other Bretton Woods framers essentially made the dollar equal to gold as a backstop for the global economy. Since the United States had virtually all of the monetary gold in the world at the end of WWII with some $35 billion in gold (valued at $35 per ounce), this arrangement seemed to make sense, and for a while it appeared to work.

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Truman eventually proposed the expenditure of $17 billion in 1947 and after months of lobbying by its namesake, Secretary of State George Marshall, it was adopted in 1948. Marshall later reported that American women were vastly in favor of the plan and “electric” in persuading the Congress to go along with the proposal.75
Bretton Woods and Global Inflation
The Marshall Plan to rebuild Europe, followed by the creation of the International Monetary Fund and the World Bank, created the conditions for European recovery and eventually political union in Europe. Under the Bretton Woods accord, the financial and economic discussions that had been ongoing through the war years were brought together in an ambitious effort to impose a multilateral model on the world and particularly on Europe. In keeping with the popularity of central planning among economists, a coordinated policy on trade and financial flows was envisioned.

pages: 354words: 92,470

Grave New World: The End of Globalization, the Return of History
by
Stephen D. King

They hoped also to get rid of the nineteenth-century empires, which, in their view, had substantially contributed to the carnage seen in the first half of the twentieth century. That meant, in particular, dismantling the British Empire. It is no mere chance that the conditions Washington laid down for helping the British financially during and after the Second World War were notably tough.
The Bretton Woods Conference – which took place in July 1944 in the Mount Washington Hotel in Bretton Woods, New Hampshire – appeared to represent a marked departure from previous behaviour. There was a strong desire to avoid the foolishness of the interwar period, during which time attempts to return to the gold standard at pre-war exchange rates had led to both painful austerity and ultimate economic and financial chaos. Having re-joined the gold standard in 1925 – a year after John Maynard Keynes had termed gold ‘a barbarous relic’2 – the UK was eventually forced to devalue sterling in 1931, thanks to a perilously weak balance of payments position made worse as the world plunged into recession at the beginning of that decade.

…

As John Maynard Keynes discovered during the Bretton Woods negotiations, cleverness was no substitute for diplomacy and deep pockets.
THE BEDROCK OF INSTITUTIONAL GLOBALIZATION
These ambitions – driven primarily by American self-interest – led to the creation of three institutions that became the bedrock of post-war economic and financial globalization: the International Monetary Fund (IMF), the World Bank – eventually a supercharged aid agency, but initially designed to facilitate post-war reconstruction – and, two years after the end of the Second World War, the General Agreement on Tariffs and Trade (otherwise known as GATT, the precursor to the World Trade Organization).
The IMF was to be run by an American. Unfortunately, the only one in contention – Harry Dexter White, Keynes’ Bretton Woods nemesis – was rumoured to be a Soviet spy.4 President Truman decided that a Belgian, Camille Gutt, would have to do instead.

…

Government debt levels inevitably soared, leading in some cases to sovereign bond crises.
The post-war Bretton Woods institutions – and their offshoots – had not kept pace with the internationalization of market forces. Whilst the OECD had broadened its membership, it was still primarily a ‘rich man’s club’, unable to cope with the growing influence of, for example, China or India. The European Union had created a single market and a shared currency, but lacked the key arrangements that most successful common currency areas – nation states, in other words – take for granted: a common budget, fiscal transfers, a banking union and some form of political union. The IMF was still hamstrung by US dominance – a legacy of Bretton Woods – and was struggling to reshape itself for a world of massive savings imbalances and ever-larger balance of payments disequilibria.

CHAPTER 2
The Global Money Glut
The balance of payments commands, the balance of trade obeys, and not the other way round.
—Eugen von Boehm-Bawerk1
When the Bretton Woods international monetary system broke down in 1971, something extraordinary began to happen. The central banks of some countries began printing fiat money and using it to buy the currencies of other countries. Before 1971, currencies were pegged either directly or indirectly to gold. Therefore, there was nothing to be gained by creating fiat money in order to buy any other country’s currency. When the fixed exchange rate system ended with the collapse of the Bretton Woods system, however, that changed. Gradually, it became apparent that a country could gain an export advantage if its central bank created fiat money and used it to buy the currencies of its trading partners.

…

Since countries could not manipulate gold’s value, trade imbalances were resolved by market-determined adjustments to the price level of both countries. The deficit country experienced falling prices and the surplus country experienced inflation. Those price trends continued until the balance of trade was restored.
After the Bretton Woods system broke down in the early 1970s, however, currency values began to move up and down relative to one another—that is to say that currencies were floating rather than fixed. In this post–Bretton Woods arrangement, trade balances are the most important fundamental factor determining the long-term direction of exchange rate movements. A country with a trade surplus will normally experience an appreciating currency, while the currency of a country with a trade deficit will tend to depreciate.

…

Financial Account Balance, 1970 to 2007
Source: IMF
An imbalance of investments on this scale was not possible under a gold standard. It would have involved the outflow of huge quantities of gold from the countries making the foreign investments. At a time when gold was money, the loss of so much gold would have caused a sharp contraction of the money supply and that would have created an economic crisis. In the post–Bretton Woods’ world, however, where money can be created on demand and without limit, the constraint previously imposed by a finite amount of money is no longer a concern.
The investments that resulted in the extraordinary surplus on the U.S. financial account were funded with fiat money created by central banks outside the United States. This can be seen very clearly in Exhibit 2.3, which compares the annual increase in total foreign exchange reserves with the balance on the U.S. financial account.

This was a revival of the Bretton Woods system for the small number within the EEC. The deutschmark was most often the strongest currency. It began to play the role the dollar had played in the Bretton woods system. But there was a crucial difference. The German Bundesbank had always followed orthodox monetary policy with strict control over money supply. There was no support for government debt through printing money. Germany (West Germany until the reunification in 1990) was the beacon of orthodox public finance and monetary policy. It had a sound balance of payments and a strong currency. It seemed to many European countries that they should benefit from an arrangement where the deutschmark became the anchor.
Membership of the ERM meant operating within certain rules. As in Bretton Woods, if a country’s currency depreciated away from the allowed bands, deflationary policies would have to be adopted until the currency was brought back under control.

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Apart from being the sixtieth anniversary of Indian independence, it was also the thirty-sixth anniversary of the day on which President Richard Nixon announced that the US would renege on its obligation to buy gold at $35 an ounce. That obligation had been the foundation of the postwar system of exchange rates known as the Bretton Woods system. It was named after the town in New Hampshire where in July 1944 the Allies had met and hammered out the postwar order for international monetary relations. The Bretton Woods system kept all exchange rates fixed in relation to the dollar, while the dollar was fixed in terms of gold. This was the Dollar Exchange Standard. It replaced the Gold Standard that had been around for 300 years prior to World War II. Nixon’s rejection of the obligation to buy gold at a fixed price ushered in an era of flexible exchange rates.

…

He believed that countries running surplus should make an equal effort at importing more, whereby their surpluses would go down and help the deficit countries to export more.
The Americans, who were going to be the sole surplus country in the immediate postwar period, did not fancy being compelled to adapt their policy to outside diktats. Keynes’s version of the Bretton Woods system was not accepted in its entirety. Keynes’s plan of creating a common currency for the world was also not acceptable in the circumstances. At Bretton Woods, instead of the Gold Standard, the outcome was the dollar exchange standard, with the dollar’s value fixed in terms of gold. The US agreed to buy and sell gold at $35 an ounce, as the Bank of England had done before World War I (at £3 17s 10½d). But gold was not to circulate domestically, nor would citizens be allowed to present gold bullion for coinage.

Charlemagne’s enlightened policies of uniformity, in combination with the continuity of local custom, exist today in the EU’s subsidiarity principle. The contemporary EU motto, “United in diversity,” could as well have been Charlemagne’s.
■ From Bretton Woods to Beijing
The euro project is a part of the more broadly based international monetary system, which itself is subject to considerable stress and periodic reformation. Since the Second World War, the system has passed through distinct phases known as Bretton Woods, the Washington Consensus, and the Beijing Consensus. All three of these phrases are shorthand for shared norms of behavior in international finance, what are called the rules of the game.
The Washington Consensus arose after the collapse of the Bretton Woods system in the late 1970s. The international monetary system was saved between 1980 and 1983 as Paul Volcker raised interest rates, and Ronald Reagan lowered taxes, and together they created the sound-dollar or King Dollar policy.

…

When the world returns to a gold standard, either by choice to create inflation, or of necessity to restore confidence, it will be crucial to have support from all the world’s major economic centers. A major economy that does not have sufficient gold will either be relegated to the periphery of any new Bretton Woods–style conference, or refuse to participate because it cannot benefit from gold’s revaluation. As in a poker game, the United States possessed all the chips at Bretton Woods and used them aggressively to dictate the outcome. Were Bretton Woods to happen again, nations such as Russia and China would not permit the United States to impose its will; they would prefer to go their own way rather than be subordinate to U.S. financial hegemony. A more equal starting place would be required to engender a cooperative process for reforming the system.

…

., involving alternative scenarios of a shooting war between Israel and Iran. Participants were given conventional military scenarios and then asked to assess the financial impact and show how financial weapons might be used as a force multiplier.
On October 25, 2012, the Boeing Corporation conducted a financial war game during an offsite conference in Bretton Woods, New Hampshire. The conference was held at the historic Mount Washington Hotel, famous as the site of the 1944 Bretton Woods conference that established the international monetary system, which prevailed from the end of the Second World War until President Nixon closed the gold window in 1971. Although Boeing is a corporation and not a sovereign state, its interest in financial warfare is hardly surprising. Boeing has employees in seventy countries and customers in 150 countries, and it is one of the world’s largest exporters.

eBook <www.wowebook.com>
world economy was based on a set of arrangements worked out at the conference of allied ﬁnance ministers (which effectively meant the United States
and the United Kingdom) at Bretton Woods, New Hampshire, in 1944, with
Lord Keynes providing many of the key concepts. To grossly simplify, in the
Bretton Woods system, the world’s currencies were effectively pegged to the
US dollar in place of the old gold standard, but the US dollar had to maintain
a link to gold. Bretton Woods created a new international institution, the
International Monetary Fund (IMF), which pooled resources of participating
countries in order to make funds available to help them make adjustments
necessitated by balance-of-payment problems.
The key weakness in the Bretton Woods system was that it required monetary discipline on the part of the United States, whose dollar was in effect
the new gold, the anchor for all other currencies.The United Kingdom understood its role as issuer of the global reserve currency and played it well until
it could no longer afford it.

…

The simple fact was (and remains) that the US government could print
money without limit if it chose to, and in the 1970s it did so with a vengeance
to ﬁnance a vast expansion of social spending and the Vietnam War without
raising taxes. Other countries got stiffed as America paid its bills in dollars of
diminishing value. The Bretton Woods deal included a gold window, where
dollar claims could be converted, but the United States lacked the gold. So,
over a weekend, with no consultations, the United States blew up the Bretton
Woods system, closing the gold window.
This kicked off the Great Inﬂation, and it ushered in an era of ﬂoating exchange
rates that we are still living with today. OPEC, an attempt by oil producers to
use cartel tactics to raise the price of their commodity (priced in dollars) in
nominal terms to make up for the fall in the real value of the dollar, was a key
side effect.

…

However, everyone had cheerfully lived with this way of settling foreign
exchange trades for generations up to 1971.There just wasn’t that much business under the stable rates of Bretton Woods or the gold standard before.
Then, overnight, the global foreign exchange market grew by leaps and bounds
as currencies were allowed to ﬂoat against each other in market trading.
This is where the revolution in technology comes into play. If there is a great
deal of friction in making a market transaction, as Nobel Prize–winning economist Ronald Coase pointed out 80 years ago, it will tend to be replaced
by bureaucratic command and control or not occur at all. This is why so
much “business” takes place within huge corporations instead of free markets.
Bretton Woods was very much a bureaucratic solution worked out between
governments. Ending it opened up a huge scope for market transactions overnight, but the friction encountered was monumental.The key steps in a market
transaction are ﬁnding a counterparty to take the other side of the trade;
qualifying the counterparty as trustworthy; price discovery, which is essentially using the market to determine if the counterparty is offering or taking a
fair price; executing the trade—essentially making a contract; and settling the
trade (i.e., paying or getting paid).

First, they wanted to build trade ties abroad to avoid a slide back into depression at home, to help create jobs for 11 million returning soldiers, and to extend the economic gains of the war. Second, they sought to promote democracy and thwart communism by containing the risk that European misery might provoke a third and even more destructive world war.
At Bretton Woods, Treasury Secretary Henry Morgenthau Jr. delivered the closing remarks:
We are at a crossroad, and we must go one way or the other. The Conference at Bretton Woods has erected a signpost—a signpost pointing down a highway broad enough for all men to walk in step and side by side. If they will set out together, there is nothing on earth that need stop them.8
The proposed destination was universal peace and prosperity, and the road was mapped and paved by the United States and its European allies.

…

Just as oil markets reached a game-changing moment earlier than most expected, so too did the central contradiction of the Bretton Woods Monetary Agreement. The system it created depended for stability on a U.S. commitment to provide two reserve assets, dollars and gold. Both were offered at a fixed price—gold, for example, could be redeemed at $35 an ounce—but while the supply of dollars was flexible enough to meet changes in demand, the supply of gold was not. In the late 1960s, U.S. government spending, particularly on the Vietnam War, fueled deep current-account and trade deficits. Inflation surged, and several European governments, concerned by a depreciating dollar and unwilling to weaken their own currencies to preserve the peg, demanded gold in exchange for large amounts of their dollar reserves.
In response, President Richard Nixon terminated the Bretton Woods agreement. On August 15, 1971, he moved to “suspend temporarily the convertibility of the American dollar into gold or other reserve assets, except in amounts and conditions determined to be . . . in the best interests of the United States.”29 Though the White House described the move as temporary, it has never been reversed.

…

This is the G-Zero: Everyone is waiting for someone else to put out the fire. How did we reach this breakdown in the international order?
FROM THE ASHES
The road to the G-Zero begins at the height of American dominance. At the end of World War II, much of Europe lay in ruins for the second time in less than thirty years. Even before the war ended, representatives of forty-four nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, to lay the foundation for a new global economy. From the agreement signed there in July 1944 came the International Monetary Fund, the International Bank for Reconstruction and Development (which soon became part of what would be the World Bank), and a plan to establish new commercial and financial relations among nations and set exchange rates that tied the currencies of each member to the U.S. dollar.

With such enormous sums moving around the increasingly globalized economy, it was becoming more clear that the world would need a new international financial system to finance postwar reconstruction and stabilize trade. In July 1944 more than seven hundred delegates from the forty-four Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, for the United Nations Monetary and Financial Conference. Henry Morgenthau and Harry Dexter White led the American delegation. The conference agreed on the creation of the International Monetary Fund (IMF) and an International Bank for Reconstruction and Development (BRD), which became part of the World Bank. The IMF would monitor exchange rates and lend reserve currencies to indebted countries. The new bank would provide loans to underdeveloped countries. Bretton Woods also gave its name to a new international currency exchange system, where currencies were linked to the US dollar. In exchange the United States agreed to fix the price of gold at $35 an ounce.

They set interest rates, thus deciding the value of our savings and investments. They decide whether to focus on austerity or growth. Their decisions shape our lives.
The BIS’s tradition of secrecy reaches back through the decades. During the 1960s, for example, the bank hosted the London Gold Pool. Eight countries pledged to manipulate the gold market to keep the price at around thirty-five dollars per ounce, in line with the provisions of the Bretton Woods Accord that governed the post–World War II international financial system. Although the London Gold Pool no longer exists, its successor is the BIS Markets Committee, which meets every other month on the occasion of the governors’ meetings to discuss trends in the financial markets. Officials from twenty-one central banks attend. The committee releases occasional papers, but its agenda and discussions remain secret.

As we have already discussed, when the underlying value of money is put in question, the ramifications extend from the top to the bottom of the monetary hierarchy: from the institutions responsible for the governance of world money, to the workers, consumers, and pensioners whose very livelihoods are put at stake by the dynamics of inflation and deflation. Harvey cites Roosevelt’s New Deal as one major example of these forces at work. Two more recent instances that I want to discuss here are the aftermath of the collapse of the Bretton Woods regime, which saw major struggles between capital and labor being waged against the background of a new international regime of floating exchange rates, and the ongoing crisis within the Eurozone, whose devastating effect across classes and generations is still being played out.
One of the classic analyses of the Bretton Woods crisis from the perspective of Marx’s theory of money and credit was advanced by Christian Marazzi in his 1976 paper, “Money in the World Crisis” (Marazzi 1995). Marazzi, an economist, is one of several Marxist thinkers who explored the theoretical implications of post-Fordism (Marazzi 2008, 2010).

…

There is, in short, a structural connection among money, credit, and class politics, which in the first instance is expressed through wage costs.30
Marazzi deals with the issue of how to define the monetary base in the absence of gold by focusing on power. He suggests that sterling, and subsequently the dollar, had already displaced gold as the “money of all monies” long before the Bretton Woods system collapsed. Increasingly the international power of states, not gold, determined the value of all currencies.31 Credit was increasingly being created ex nihilo, no longer based on accumulated surplus value but on no existing value whatsoever. The demise of Bretton Woods made it impossible for money to maintain even the appearance of being detached from basic struggles over wages. Money and credit now had to take sides in social struggle because their underlying value increasingly depended not on a relationship with gold, however tenuous that relationship might have been, but—directly and explicitly—on their capacity to command labor.

…

Money and credit now had to take sides in social struggle because their underlying value increasingly depended not on a relationship with gold, however tenuous that relationship might have been, but—directly and explicitly—on their capacity to command labor. In other words, if the underlying value of money was to be sustained, workers would have to pay the price through lower wages. This arrangement, Marazzi argues, was the key problem that states increasingly faced after Bretton Woods. Money became the site of an explicit assertion of state power against the working class. Money lost its mystical appearance. Its apparent independence from politics, and its quality as a thing, were exposed as illusory. Money’s social life, in all of its depth and complexity, came brutally to the fore.
Given that the Bretton Woods system was international in scope, the international ramifications of its collapse must also be understood. The demonetarization of gold had had a direct negative effect on Italy, France, and Portugal, whose reserves were dependent on the gold price, and upon the Soviet Union, which used gold to settle its accounts with the outside world.

The post-war arrangements had effectively locked away instability into two zones of control: relations between currencies and relations between classes. Under the Bretton Woods rules, you were not supposed to devalue your currency to make your exports cheap and boost employment. Instead, if your economy was uncompetitive, you could either protect yourself from international competition through trade barriers, or impose ‘internal devaluation’ – cutting wages, controlling prices, reducing the amount spent on welfare payments. In practice, protectionism was discouraged by the Bretton Woods rules and wage cutting was never seriously attempted until the mid-1970s – which left devaluation. In 1949, Britain devalued Sterling by 30 per cent against the dollar and twenty-three other countries followed suit. A total of 400 official devaluations took place before 1973.
So, from the outset, Bretton Woods was a system where states were repeatedly trying to offset their economic failings by manipulating their exchange rates against the dollar.

…

THE POWER OF EXPLICIT RULES
On 1 July 1944, a special train delivered a cargo of economists, statesmen and bankers to White River Junction, Vermont, from where they were ferried to a hotel in New Hampshire. ‘All trains, regular or scheduled, had to look out for us,’ the train’s fireman remembered, ‘we had the right over everything.’14 Their destination was Bretton Woods. There they would design a global monetary system that, like the train, had ‘the right over everything’.
The Bretton Woods Conference agreed a system of fixed exchange rates designed to restore pre-1914 stability, only this time with explicit rules. All currencies would be pegged against the dollar, and the USA would peg the dollar to gold at $35 an ounce. Countries whose trade balance became seriously out of kilter would have to buy or sell dollars to keep their own currency at the agreed peg.

…

Because the banking regulations acted as an effective tax on financial assets, economists calculate they raised the equivalent of a fifth of all government income during the boom, even more in the UK.18 The result was to shrink advanced country debts to a historic low of 25 per cent of GDP by 1973.
In short, Bretton Woods achieved something unprecedented: it shrank the debts run up during a global war, suppressed speculation, mobilized savings into productive investment and enabled spectacular growth. It pushed all the latent instability of the system into the sphere of relationships between currencies, but US dominance ensured these were, at first, contained. Right-wing outrage over the inflationary aspect of Bretton Woods was overcome by the greatest period of stability and full production ever known.
Keynes had emphasized, at the design stage the importance of explicit rules – going beyond the gentlemen’s agreement that lay behind the Gold Standard.

Post-war aid can be broken down into seven broad categories: its birth at Bretton Woods in the 1940s; the era of the Marshall Plan in the 1950s; the decade of industrialization of the 1960s; the shift towards aid as an answer to poverty in the 1970s; aid as the tool for stabilization and structural adjustment in the 1980s; aid as a buttress of democracy and governance in the 1990s; culminating in the present-day obsession with aid as the only solution to Africa’s myriad of problems.
The main agenda of the Bretton Woods conference was to restructure international finance, establish a multilateral trading system and construct a framework for economic cooperation that would avoid a repeat of the Great Depression of the 1930s. As they anticipated the post-Second World War era, the architects of the 1944 Bretton Woods gathering foresaw that if Europe were to regain any semblance of social, political or economic stability, vast injections of aid would have to be poured in.

Therefore, for the purposes of this book, aid is defined as the sum total of both concessional loans and grants. It is these billions that have hampered, stifled and retarded Africa’s development. And it is these billions that Dead Aid will address.
2. A Brief History of Aid
The tale of aid begins in earnest in the first three weeks of July 1944, at a meeting held at the Mount Washington Hotel in Bretton Woods, New Hampshire, USA. Against the backdrop of the Second World War, over 700 delegates from some forty-four countries resolved to establish a framework for a global system of financial and monetary management.1 As discussed later, it is from this gathering that the dominant framework of aid-infused development would emerge.
The origins of large-scale aid transfers date as far back as the nineteenth century – when even in 1896 the US provided overseas assistance in the form of food aid.

A second was the political order articulated in the UN Charter; the third the economic order formulated at Bretton Woods. Let us take a brief look at these components of the projected international system, focusing on the human rights dimension.
The Bretton Woods system functioned into the early 1970s, a period sometimes called the “Golden Age” of post-war industrial capitalism, marked by high growth of the economy and progress in realizing the socioeconomic rights of the UD. These rights were a prominent concern of the framers of Bretton Woods, and their extension during the Golden Age was a contribution to translating the UD from “pious phrases” and a “letter to Santa Claus” to at least a partial reality.
One basic principle of the Bretton Woods system was regulation of finance, motivated in large part by the understanding that liberalization could serve as a powerful weapon against democracy and the welfare state, allowing financial capital to become a “virtual Senate” that can impose its own social policies and punish those who deviate by capital flight.

…

But that luxury was no longer available in the more democratic Bretton Woods era, so that “limits on capital mobility substituted for limits on democracy as a source of insulation from market pressures.” It is therefore natural that the dismantling of the post-war economic order should be accompanied by a sharp attack on substantive democracy and the principles of the UD, primarily by the US and Britain.
There is a great deal to say about these topics, but with regard to the human rights aspect, the facts seem reasonably clear and in conformity with the expectations of the founders of the Bretton Woods system.
The Political Order and Human Rights
The third pillar of post-World War II world order, standing alongside the Bretton Woods international economic system and the UD, is the UN Charter.

…

Another factor in the debt crisis was the liberalization of financial flows from the early 1970s. The post-war Bretton Woods system was designed by the US and UK to liberalize trade while exchange rates were stabilized and capital movements were subject to regulation and control. The decisions were based on the belief that liberalization of finance may interfere with trade and economic growth, and on the clear understanding that it would undermine government decisionmaking, hence also the welfare state, which had enormous popular support. Not only the social contract that had been won by long and hard struggle, but even substantive democracy, would be damaged by loss of control on capital movements.
The Bretton Woods system remained in place through the “golden age” of economic growth and significant welfare benefits.

Another influential think tank is the Council on Foreign Relations, whose board of directors includes former U.S. treasury secretary Robert Rubin, Larry Fink of BlackRock, and Steve Schwarzman of Blackstone. The ones I am personally most familiar with are the Group of Thirty, the Bretton Woods Committee, and the Institute of New Economic Thinking (INET). The Group of Thirty18 focuses on economic issues, and its board includes the heads of the ECB, the Bank of England, BlackRock, and UBS. The Bretton Woods Committee19 examines international economic cooperation and counts Larry Summers, George Soros, Klaus Schwab, and many central bank governors on its board. Both the Group of Thirty and the Bretton Woods Committee congregate during the meetings of the IMF, therefore taking advantage of all the power players being in one place.
INET works on reforming economic theories to better serve economies.

INET works on reforming economic theories to better serve economies. It was founded by George Soros, and the organization quickly found support from other financiers. Its gatherings are prime examples of executive networking, as they attract a truly mind-blowing assortment of Nobel Prize laureates and otherwise überaccomplished academics, central bankers, and top financial executives.
INET: Connecting the Connected at Bretton Woods
The first INET conference I attended took place in Bretton Woods, in New Hampshire’s White Mountains. Together with George Soros and his team, I took a private plane from Teterboro Airport in New Jersey and arrived an hour later at Mount Washington Regional Airport. It was early April, and the majestic Appalachian Mountains were still covered in snow. A minibus picked us up and made a detour to an observation deck to let us take in the imposing, rugged landscape.

Such an effort to reconcile market prices with social values could surprise politicians with its economic effects: On any reasonable measure of economic performance, putting high prices on public goods and environmental resources would lead to higher, not lower, economic growth.
Currencies and Financial Relations: Will There Be a New Bretton Woods?
A comprehensive reform of the global currency system has been widely demanded in the aftermath of the crisis. The French, Chinese, and many other governments have called for a new Bretton Woods and for a new international reserve currency to replace the dollar. These calls have sometimes been endorsed by such prominent U.S. and British policymakers as Paul Volcker and Gordon Brown. Yet a diminution in the international role of the dollar, or a return to the fixed currencies of the postwar period, are extremely unlikely in the decades ahead.

…

Exchange rate flexibility gave governments around the world the freedom to cut interest rates and to support their economies with fiscal stimulus that could never have been imagined in the days of Bretton Woods. Conversely, the financial turmoil that engulfed the eurozone after the worst of the banking crisis was over in other countries reminded the world of the dangers of long-term commitments to fixed exchange rates and of the immense costs of defending currencies in a system disturbingly reminiscent of the gold standard of the 1930s. Any reversion to fixed exchange rates, still less to a gold-based system such as Bretton Woods, therefore seems out of the question. Since 1971, the world has lived without any monetary standard for the first time in history, and this is not about to change. Pure paper money is simply too powerful and too useful to be uninvented—like nuclear weapons, penicillin, or the pill.

…

The Myth of National Bankruptcy
The Myth of Burdening Our Grandchildren
The Real Case for Tackling Deficits
Japanese-Style Paralysis and Zombie Banks
The Great Rebalancing of Global Growth
Stagflation
CHAPTER SEVENTEEN - Politics in Capitalism 4.0
Conservatives Will Keep Winning Until Progressives Find a Narrative
More Government Means Smaller Government
Democracy Means Less Power for Public Opinion
Bigger Deficits Are Necessary but Impossible
Priorities: Less Spending and More Taxes
International Experience: Learning from Others’ Mistakes
Commanding Heights: As Socialism Has Retreated, It Has Won
Health Reform: More Government and More Market
Health Care Reform Will Become a Conservative Issue
Progressives Will Fight for Less Progressive Taxes
CHAPTER EIGHTEEN - Finance and Banking in Capitalism 4.0
Finance Is Indispensable
Uncertainty and Guarantees
Regulation
Capital Structures
Accounting
Credit Ratings and Macroeconomic Assumptions
Mortgage Market Reform
Fiduciary Duty and Government as a Silent Partner
Bankers’ Earnings and Bank Profits
Talent and Plunder
CHAPTER NINETEEN - The World of Capitalism 4.0
Global Competition between the United States and China
Convergence between the United States and Europe
The Rivalry of Western and Asian Values
Business Interests Will Embrace the New Model
Trade and Industrial Structures
Limits to Growth and Physical Resources
The Environment Can Become a Positive Economic Story
Prosperity without Growth
Currencies and Financial Relations: Will There Be a New Bretton Woods?
Will Global Governance Be Strengthened to Resolve Global Problems?
Notes
Bibliography
Acknowledgements
Index
Copyright Page
In memory of my late parents, Jacob and Esther Kaletsky, who experienced true calamities and crises—the Russian Revolution, the two world wars, the Holocaust, the purges of Stalin—but whose joyful and indomitable spirits lived on.
Introduction
THE WORLD DID NOT END.

pages: 409words: 118,448

An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy
by
Marc Levinson

When the carnage was over, one dollar bought only half as many deutsche marks as it had six years earlier, and just two-thirds as many yen. The dollar-based Bretton Woods system of fixed exchange rates was dead.5
Central bankers were prominent among the mourners, for many of them held a nearly religious belief in the importance of fixed exchange rates. “The Sunday meeting of the governors was marked by an atmosphere of gloom that could not be wholly attributed to the weather,” US Federal Reserve governor Jeffrey Bucher reported after meeting with his counterparts in Switzerland. But the central bankers’ concerns didn’t much matter: the decision to abandon Bretton Woods was irreversible. More consequential was the displeasure of the oil-exporting countries. They had always priced their product in US dollars, but the dollar’s collapse meant that each million barrels of oil would buy fewer German trucks and Japanese I-beams.

…

From his ornate ground-floor office in Threadneedle Street, opening onto the monastic stillness of an interior garden planted with mulberry trees, the governor of the Bank of England may have exercised greater authority than any other central banker in the world.3
But as Richardson took charge at the Bank, that authority was under threat. Under the Bretton Woods system, governments had maintained a host of regulations to control interest rates and limit the movement of money in order to keep exchange rates fixed. As Bretton Woods blew apart in the early 1970s, however, many of those restrictions were abandoned. Disregarding national borders, money began flowing to places where it could earn higher returns or go untaxed. Much of it ended up in London, the premier international banking center, in accounts denominated in US dollars.
A large portion of that money was owned by the oil states of the Middle East and North Africa, which were taking in unprecedented quantities of dollars as they pushed up the price of oil.

…

Hetzel, “Arthur Burns and Inflation,” Federal Reserve Bank of Richmond Economic Quarterly 84 (Winter 1998): 21–84.
5. The description of the Bretton Woods agreement in this paragraph is extremely simplified. For more background, see Barry Eichengreen, Globalizing Capital: A History of the International Monetary System, 2nd ed. (Princeton, NJ: Princeton University Press, 2008), 91–133.
6. Michael D. Bordo, Ronald MacDonald, and Michael J. Oliver, “Sterling in Crisis, 1964–1967,” European Review of Economic History 13 (2009): 437–459; Barry Eichengreen, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System (Oxford: Oxford University Press, 2011). Many of the problems that would develop from the Bretton Woods arrangements were described in 1959 by the economist Robert Triffin; see his book Gold and the Dollar Crisis (New Haven, CT: Yale University Press, 1960).
7.

This doctrinal volte-face represents a widespread disillusionment resulting from the destructive behaviour of these movements in the interwar years.54
At Bretton Woods, in New Hampshire’s White Mountains, the soon-to-be-victorious Allies met in July 1944 to devise a new financial architecture for the post-war world. In this new order, trade would be progressively liberalized, but restrictions on capital movements would remain in place. Exchange rates would be fixed, as under the gold standard, but now the anchor - the international reserve currency - would be the dollar rather than gold (though the dollar itself would notionally remain convertible into gold, vast quantities of which sat, immobile but totemic, in Fort Knox). In the words of Keynes, one of the key architects of the Bretton Woods system, ‘control of capital movements’ would be ‘a permanent feature of the post-war system’.55 Even tourists could be prevented from going abroad with more than a pocketful of currency if governments felt unable to make their currencies convertible.

…

Thus, for the next quarter century, did governments resolve the so-called ‘trilemma’, according to which a country can choose any two out of three policy options:1. full freedom of cross-border capital movements;
2. a fixed exchange rate;
3. an independent monetary policy oriented towards domestic objectives.57
Under Bretton Woods, the countries of the Western world opted for 2 and 3. Indeed, the trend was for capital controls to be tightened rather than loosened as time went on. A good example is the Interest Equalization Act passed by the United States in 1963, which was expressly designed to discourage Americans from investing in foreign securities.
Yet there was always an unsustainable quality to the Bretton Woods system. For the so-called Third World, the various attempts to replicate the Marshall Plan through government-to-government aid programmes proved deeply disappointing. Over time, American aid in particular became hedged around with political and military conditions that were not always in the best interests of the recipients.

Once again, Chicago’s influential economists, and especially the famous monetarist Milton Friedman, were behind the initiative. In 1968, when Nixon was elected president, Friedman wrote him a letter urging him to abandon the so-called Bretton Woods system. Bretton Woods, named for the town in New Hampshire where the system was devised in July 1944, was the international monetary agreement put in place at the end of World War II. The Bretton Woods conference led to the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (now part of the World Bank). More important for our story was the fact that under the Bretton Woods system, major world currencies were valued at fixed exchange rates, based on the value of the U.S. dollar (and ultimately on gold, because the dollar was freely exchangeable for gold, at least for foreign governments).

…

Such a rush in fact occurred in late 1967, which was the impetus for Friedman to write his letter. But for a thinker like Friedman, the Bretton Woods system was ill conceived from the start: it was hopeless for governments to try to set exchange rates at all. Exchange rates, like anything else, should be determined freely in an open market.
Nixon didn’t listen to Friedman at first, but by 1971, with increased spending in Vietnam accelerating the accumulation of U.S. debt, he saw the writing on the wall. First West Germany and Japan pulled out of the Bretton Woods agreement and announced their currencies would no longer maintain parity with the dollar. Then, rather than wait for the world economy to collapse, Nixon administered the coup de grâce to the Bretton Woods system by ending the convertibility of U.S. dollars to gold. Over the next years, the fixed exchange rates gave way to floating rates, creating a system whereby the relative prices of currencies were determined on the open market.

…

Friedman wrote him a letter . . .”: This is from Milton Friedman’s foreword to Melamed (1993).
“Bretton Woods, named for the town in New Hampshire . . .”: For more on the Bretton Woods system, see Markham (2002) and MacKenzie (2006), as well as Eichengreen (2008) and Melamed (1993).
“. . . Leo Melamed, the chairman of the Chicago Mercantile Exchange . . .”: For more on the history of the CME and the IMM, see Melamed (1993).
“What does the IMM have to do with Black and Scholes . . .”: I am grateful to John Conheeney, former chief executive of Merrill Lynch Futures and former board member of both the Chicago Board of Trade and the Chicago Mercantile Exchange, for pointing out the relationship between the decay of Bretton Woods and the rise of derivatives trading.
“The distinction may seem inconsequential . . .”: I am grateful to Emanuel Derman for pointing out to me how consequential the differences are, from the perspective of practicing bankers.

Why a multi-level currency system?
The criticism of ‘undue complexity' is valid only if habit makes us
overlook the inefficiencies and complexities of the money system of
1999. This system involves some 170 different national currencies,
disorganised in eight different types of monetary systems according
to the IMF's own reports. In any case, the record of the post-Bretton
Woods monetary modus vivendi is clearly unsatisfactory.
During the nearly three decades since the demise of the Bretton
Woods arrangements, the annual rate of economic growth in
developed countries has fallen by a third, and the incidents of
international financial crises have increased sharply - to the point
where even countries that follow sound economic policies are often
stricken along with the profligate. According to figures cited by the
World Bank no fewer than 69 countries have endured serious
banking crises since the late nineteen-seventies, and 87 nations have
seen runs on their currency since 1975.

…

Back in the 1960s, the proponents of freely floating
currency exchanges used to argue that currency volatility would
drop as soon as a free market was established. Foreign exchange
markets are certainly now much more open and free than they were
in the 1960s, when the Bretton Woods fixed-exchange-rate system
was operational.
However, an OECD (the Organization of Economic Co-operation
and Development based in Paris) statistical study came to some
sobering conclusions, directly contradicting the theoretical forecast.
The past 25 years of floating exchanges have revealed an average
foreign exchange volatility four times higher than under the Bretton
Woods fixed-exchange system.
It does not require a statistical rocket scientist to understand why
the volatility increases with the speculative volume of the trades.
Simple common sense explains it just as well.

…

Initially designed as a clearinghouse for transactions among
central banks, it has evolved into a meeting ground for central
bankers and a research centre about issues of interest to the monetary
system as a whole.
Website: http://www.bis.org/
Barters: The direct exchange of goods or services unmediated by
any type of currency.
Bonds: Financial instrument sold by a borrower against periodic
payment of interest and of the principal at maturity.
Bretton Woods: Township in New Hampshire where the Bretton
Woods Agreement was finalised in 1945 after negotiations mainly
between the British and the US. The system agreed upon has also
been called the dollar gold equivalence standard, because it gave the
status of official global reserve currency to the US$, on condition that
the US guaranteed the convertibility of dollars into gold on demand
of other central banks, at a fixed rate of 535 per ounce.

Other countries have allowed exports to lead their economic growth and enjoyed the U.S. deficit while complaining about it.”40
To return to a pegged exchange rate system, which they claimed to prefer, Europeans would have to agree to symmetrical adjustment, imposing obligations on surplus and deficit countries alike. But the Bretton Woods system had come to depend on adjustment by deficit countries alone, and that is why it broke down. Like the Chinese position today, the Europeans and Japanese rejected the notion that surplus countries should bear their share of adjustment. They feared that revaluations of their currencies would depress exports, output, and employment. The United States looked at the situation differently. During the Kennedy-Johnson years, the government supported the value of the dollar, fixed by the Bretton Woods agreement. Now government officials questioned that policy because they came to believe that the dollar was overvalued, leading to declining exports and jobs.

…

Most of the foreign media was critical. Paul Volcker was sent to London to brief the financial ministers and chief bankers of the big countries. He reported “that they [the Europeans] did not feel anger as much as anguish that the United States had not arrived with a prepared solution to save the system [Bretton Woods].”86 The administration was divided on the fate of the fixed exchange system. Shultz, like his monetarist mentor Milton Friedman, wanted flexible rates. Volcker and Burns sought to salvage as many of the trees of Bretton Woods as they could. Connally and Nixon, who had neither institutional nor ideological loyalties, were agnostic. Both just wanted to get the job done— reverse the balance of payments, produce prosperity, and reduce unemployment. The bold action, especially the temporary border tax, was the stick to get the Europeans to accept a big shift in exchange rates, trade liberalization, and more help on defense costs.

This mutiny caused a panic on the London Stock Exchange and a run on the pound, bringing Britain’s economic troubles to a head and finally forcing it off the gold standard for good on 21 September 1931. The United States left on 5 June 1933.
As World War II drew to a close, the Allied nations decided to create a new international monetary system. Delegates from many nations came together in July 1944 in Bretton Woods, New Hampshire, and after three weeks of discussions drew up the Bretton Woods Agreement, which created the International Monetary Fund and the International Bank for Reconstruction and Development (now part of the World Bank). The goal from the beginning was to come up with some international infrastructure to use instead of the gold standard. The position of John Maynard Keynes, probably the world’s most famous economist at the time, was that the gold standard was a non-starter (Conway 2014a).

…

His view was that it had worked only briefly in the late nineteenth century, and even then only because of a sequence of happy accidents. It failed because when countries found themselves with a balance of payments deficit, the painful adjustment was ‘compulsory for the debtor and voluntary for the creditor’.********
Thus, the Bretton Woods delegates decided to replace the old gold standard with a new system based on the US dollar, with that dollar backed by gold. Under the terms of the agreement the United States would sell gold at $35 per ounce to any foreigner who wanted it.
Straightforward. However, the Bretton Woods system that came into being towards the end of the 1950s was a very different arrangement from the one Keynes and the other delegates had devised in 1944. The World Bank had been designed in large part to finance European recovery but in the event the Marshall Plan aid was twenty times greater than any of the bank’s loans.

…

When the economy is pottering along nicely, no one (least of all the politicians who are ‘in charge of’ the economy) stops to wonder what money is, what banks do or what the disruptive impact of technological change might be. I spend much of my working life looking at ways for banks, payments companies and governments to exploit new technologies, and I often therefore have to think about how the digital economy will evolve. Money is an essential part of that economy, but a common assumption seems to be that it will carry on at it is now, as if the post-Bretton Woods fiat currency is a natural phenomenon or the final stage of a directed evolutionary process.
Christine Desan, Leo Gottlieb Professor at the Harvard Law School, asks why, if industrial-age capitalism was the result of the seventeenth-century ‘redesign’ of money, we do not debate the design of money more, and I agree with her wholeheartedly (Desan 2014a). We should. The structure of central banks, commercial banks and international institutions that we have in the present comes from another age and must change.

But there is ample evidence by now that these are at best temporary expedients and generally lead to the conversion of minor problems into major crises.
That was certainly the experience under Bretton Woods before 1971. Exchange rate changes were numerous and often massive. The system worked only so long as the United States followed a moderately noninflationary policy and remained passive with respect to capital movements and exchange controls imposed by other countries.
It has been equally true of the succession of monetary arrangements in the Common Market: the European Payments Union, the "snake," the current EMS. None of these arrangements has been able to avoid exchange crises and exchange rate changes, and several have simply broken down. The EMS has been working reasonably well because Germany has been willing to play the role that the United States played under Bretton Woods, of pursuing a moderately noninflationary policy and tolerating capital movements and foreign exchange controls imposed by other member countries.

…

For present purposes, we can simplify our attempt to demystify money by concentrating on the monetary arrangement that, while historically a very special case, is currently the general rule: a pure paper money that has practically no value as a commodity in itself. Such an arrangement has been the general rule only since President Richard M. Nixon "closed the gold window" on August 15, 1971—that is, terminated the obligation that the United States had assumed at Bretton Woods to convert dollars held by foreign monetary authorities into gold at the fixed price of $35 an ounce.
Before 1971, every major currency from time immemorial had been linked directly or indirectly to a commodity. Occasional departures from a fixed link did occur but, generally, only at times of crisis. As Irving Fisher wrote in 1911, in evaluating past experience with such episodes: "Irredeemable paper money has almost invariably proved a curse to the country employing it" (1929, p. 131).

…

In the major Western countries, the link to gold and the resulting long-term predictability of the price level meant that, until sometime after World War II, interest rates behaved as if prices were expected to be stable and neither inflation nor deflation was anticipated. Nominal returns on nominal assets were relatively stable, while real returns were highly unstable, absorbing almost fully inflation and deflation (as displayed in Figure 1).
Beginning in the 1960s, and especially after the end of Bretton Woods in 1971, interest rates started to parallel rates of inflation. Nominal returns on nominal assets became more variable; real returns on nominal assets, less variable.
CHAPTER 3
The Crime of 1873*
I am persuaded history will write it [the Act of 1873] down as the greatest legislative crime and the most stupendous conspiracy against the welfare of the people of the United States and of Europe which this or any other age has witnessed.

The crisis of the tax state
From tax state to debt state
Debt state and distribution
The politics of the debt state
Debt politics as international financial diplomacy
3 THE POLITICS OF THE CONSOLIDATION STATE: NEOLIBERALISM IN EUROPE
Integration and liberalization
The European Union as a liberalization machine
Institutional change: from Keynes to Hayek
The consolidation state as a European multilevel regime
Fiscal consolidation as a remodelling of the state
Growth: back to the future
Excursus on regional growth programmes
On the strategic capacity of the European consolidation state
Resistance within the international consolidation state
4 LOOKING AHEAD
What now?
Capitalism or democracy
The euro as a frivolous experiment
Democracy in Euroland?
In praise of devaluation
For a European Bretton Woods
Gaining time
BIBLIOGRAPHY
INDEX
INTRODUCTION
Crisis Theory: Then and Now
Buying Time is an expanded version of the Adorno Lectures I gave in June 2012 at the Institut für Sozialforschung, almost exactly forty years after I graduated in sociology from Frankfurt University.1 I cannot say that I was a ‘disciple’ of Adorno. I attended some of his lectures and seminars, but did not understand much; that’s how it was in those days, and people accepted it.

…

The underlying dynamic, allowing for local variations, is the same – even for countries considered as far apart from each other as Sweden and the United States. What becomes particularly visible in a study over time is the leading role of the largest and most capitalist of all the capitalist countries, the United States, where all the trend-setting developments originated: the ending of the Bretton Woods system and of inflation, the growth of budget deficits as a result of tax resistance and tax cuts, the rise of debt-financing of government activity, the wave of fiscal consolidations in the 1990s, finance market deregulation as part of a policy of privatizing government functions, and, of course, the financial and fiscal crisis of 2008.
The causal links and mechanisms of interest to sociologists also operate in a temporal dimension, and indeed over long periods of time as far as the adaptation and change of institutions or whole societies are concerned.

…

A devaluation regime spares countries having to negotiate over structural reforms and transfer payments; interference by ‘competitive’ countries in less ‘competitive’ ones is as unnecessary as ‘growth packages’, which are at constant risk of being misunderstood by their recipients as market entry charges or a form of intergovernmental taxation on economic performance, and therefore of being rejected by those who have to pay for them. International conflicts arise only if a country devalues its currency too often in too short intervals – a practice that, however, quickly loses more in trust than it would gain from the restoration of its export capacity. For this reason alone, there is no danger that countries will use devaluation in excess to improve their market position.23
FOR A EUROPEAN BRETTON WOODS
The European Monetary Union was a political mistake. In a eurozone marked by great heterogeneity of member-states, it eliminated devaluation without also eliminating nation-states and democracy at national level.24 Instead of making things worse by rushing ahead to complement monetary union with ‘political union’ – which would in practice be nothing other than a final enthronement of the consolidation state – an attempt might be made, as long as the crisis keeps its future settlement open, to undo the euro and return to an orderly system of flexible exchange rates in Europe.25
Such a system, which would recognize the differences among European societies instead of trying to reform them out of existence along neoliberal lines, would be politically and economically far less demanding than monetary union.

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The End of Alchemy: Money, Banking and the Future of the Global Economy
by
Mervyn King

Twenty years on, the power of the United States to prevent a mutual insurance arrangement among Asian countries is limited.
The governance of the global monetary order is in danger of fragmentation. In the evolving multi-polar world, there are few remnants of the idealism of Bretton Woods. The combination of free trade and American power was a stabilising force. As the financier and historian James Macdonald puts it, ‘The unspoken bargain was that the United States would exercise a near monopoly of military force. However, it would use its force not to gain exclusive economic advantages, but as an impartial protector of Western interests. Under the American umbrella, the non-Communist world flourished.’17
The world of Bretton Woods passed away a long while ago, and with it the effectiveness of the post-war institutions that defined it – the International Monetary Fund, the World Bank and the Organisation for Economic Cooperation and Development (OECD).

…

Such bonds have been issued by a number of industrialised countries over the past thirty years (King and Low, 2014).
23 Germany, with its own objective of promoting its export sector, was a notable exception.
24 Charles Dumas (2004, 2006 (with Chovleva)) provided an early analysis of this problem.
25 Its reversal was a striking feature of what came to be known as the Bretton Woods II international monetary system. Although some foreign direct investment did move from advanced to emerging economies, it was more than offset by financial flows in the opposite direction. This analysis of the Bretton Woods II system was first put forward by Dooley, Folkerts-Landau and Garber (2003). Those authors refined and extended the analysis in a series of papers over the following decade. A key part of their argument is that China wanted to lend large sums to advanced economies so that, in the event of a major economic or political disturbance, these claims would act as ‘collateral’ against the foreign direct investment made by the same economies in China.

…

Inspired by a rather naive version of Keynesian ideas, it focused on policies to boost the demand for goods and services rather than the ability of the economy to produce them. As the former outstripped the latter, the result was inflation. On the other side of the Atlantic, the growing cost of the Vietnam War in the late 1960s also led to higher inflation.
Rising inflation put pressure on the internationally agreed framework within which countries had traded with each other since the Bretton Woods Agreement of 1944, named after the conference held in the New Hampshire town in July of that year. Designed to allow a war-damaged Europe slowly to rebuild its economy and reintegrate into the world trading system, the agreement created an international monetary system under which countries set their own interest rates but fixed their exchange rates among themselves. For this to be possible, movements of capital between countries had to be severely restricted – otherwise capital would move to where interest rates were highest, making it impossible to maintain either differences in those rates or fixed exchange rates.

Taken together, economists’ models are our best cognitive guide to the endless hills and valleys that constitute social experience.
* Whether White was actually a Soviet spy has been an ongoing controversy. The case against White was made forcefully in Benn Steil’s The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (Princeton, NJ: Princeton University Press, 2013). For the argument on the other side, see James M. Boughton, “Dirtying White: Why Does Benn Steil’s History of Bretton Woods Distort the Ideas of Harry Dexter White?” Nation, June 24, 2013. Whatever the facts of the case, it is clear that the International Monetary Fund and the World Bank served quite well the economic interests of the United States (as well as those of the rest of the Western world) in the decades following the end of the Second World War.

My friends and coauthors Sharun Mukand and Arvind Subramanian generously gave their time and helped shape the overall project with their ideas and contributions. Last but not least, my greatest debt, as always, is to my wife, pınar Doan, who gave me her love and support throughout, in addition to helping me clarify my argument and discussion of economics concepts.
Economics Rules
INTRODUCTION
The Use and Misuse of Economic Ideas
Delegates from forty-four nations met in the New Hampshire resort of Bretton Woods in July 1944 to construct the postwar international economic order. When they left three weeks later, they had designed the constitution of a global system that would last for more than three decades. The system was the brainchild of two economists: the towering English giant of the profession, John Maynard Keynes; and the US Treasury official Harry Dexter White.* Keynes and White differed on many matters, especially where issues of national interest were at stake, but they had in common a mental frame shaped by the experience of the interwar period.

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The Vanishing Middle Class: Prejudice and Power in a Dual Economy
by
Peter Temin

Reluctant to raise taxes soon after the Kennedy tax cut of the previous year and lacking congressional support as well, he overheated the economy and put great pressure on the value of the dollar, fixed at that time by the Bretton Woods system that regulated international commerce after the Second World War. The postwar dollar shortage turned into a dollar glut.1
President Nixon set himself up in opposition to Johnson. He won election to the presidency through a Southern Strategy that appealed to Southern racism and opposition to the Civil Rights Movement. He abandoned Johnson’s War on Poverty and declared a War on Drugs in 1971. He also abandoned the fixed exchange rate of the Bretton Woods system to deal with the strain on the dollar exerted by the expanding war in Vietnam.2 Nixon switched the United States to a floating exchange rate, transferring responsibility for the domestic economy from the federal government, which controls fiscal policy, to the Federal Reserve System, which controls monetary policy.

…

Nixon also replaced the ailing draft for Army soldiers with the volunteer army at this time, a plan he also started before the Oil Shock. The draft had become difficult as the Vietnam War dragged on, and conservatives argued against the idea of forced service. This was an early step in the privatization of the military.4
The Oil Shock also raised the question of how the members of OPEC were going to hold their newly acquired wealth. The highly regulated financial system established at Bretton Woods in the 1940s could not easily absorb this large inflow of cash, and the cash found a temporary home in the arrangement for dollar deposits outside the United States. These dollar deposits in European banks were known as Eurodollars, and they were not heavily regulated by either the United States or Europe. Much of the cash went to Switzerland, where banks were willing to preserve the anonymity of the depositors.

…

As a result, inflation-adjusted after-tax income was 200 percent higher in 2011 than it was in 1979 for households in that group. In contrast, households in the bottom quintile experienced inflation-adjusted after-tax income growth of 1.2 percent per year, on average. Consequently, inflation-adjusted after-tax income was 48 percent higher in 2011 than it was in 1979 for that income group.”21
The most important part of the new program was the deregulation of finance. Instead of bringing the Eurodollar system into the Bretton Woods system, new policies made American finance more like the Eurodollar system. There was a great need for financial help as the gyrations of prices and exchange rates in the 1970s and early 1980s took a fearsome toll on American industry. Resources needed to be shifted from one industry to another, and finance was needed to buy and sell companies in this process. Financial people argued that the great needs of finance required free hands to manage the economic transformation.

THE HISTORY OF GLOBAL MACRO HEDGE FUNDS
7
developed-country equity markets starting in 1945 and lasting until the early
1970s. During that time, there were few better opportunities in the global
markets than buying and holding stocks. It wasn’t until the breakdown of the
Bretton Woods Agreement in 1971, and the subsequent decline in the U.S.
dollar, that the investment universe again offered the opportunities that
spawned the next generation of global macro managers.
POLITICIANS AND SPECULATORS
Recent history is riddled with examples of politicians attempting to
place blame on speculators for shortcomings in their own policies,
and the breakdown of Bretton Woods was no exception. When the
currency regime unraveled, President Nixon attempted to lay blame
on speculators for “waging an all-out war on the dollar.” In truth, his
own inflationary policies are more often cited as the underlying
problem, with speculators a mere symptom of the problem.

…

Sometimes speculators add to volatility; other
times they dampen it.The important point is, they don’t influence the trend.
Underlying pressures combined with policy decisions drive market events.
THE NEXT GENERATION OF GLOBAL MACRO MANAGERS
The next round of global macro managers emerged out of the breakdown of the Bretton Woods fixed currency regime, which untethered
the world’s markets. With currencies freely floating, a new dimension
was added to the investment decision landscape. Exchange rate volatility
was introduced while new tradable products were rapidly being developed. Prior to the breakdown of Bretton Woods, most active trading
was done in the liquid equity and physical commodity markets. As such,
two different streams of global macro hedge fund managers emerged
out of these two worlds in parallel.
8
INSIDE THE HOUSE OF MONEY
The Equity Stream
One stream of global macro hedge fund managers emerged out of the international equity trading and investing world.

Formulated for and in Latin America during a period of chronic inflation following the debt crisis of the prior decade, these ideas quickly became the instruction sheet applied to any developing or transitioning (from communism) economy in the 1990s.
Reinventing the Bretton Woods Institutions
These Bretton Woods institutions (so named because they were set up in the aftermath of the 1944 Bretton Woods conference that reshaped the world economy after World War II) were, by the early 1980s, having a tough time of it.80 The IMF, in particular, had lost its original role and was struggling to find a new mission. The IMF was originally designed to provide offsetting finance to states facing exchange-rate shocks under the fixed-exchange-rate system that governed the world’s money from the 1940s until the 1970s—the Bretton Woods system that pegged the dollar to gold and everyone else’s currency to the dollar. Once the United States shut down gold convertibility in 1971, Bretton Woods fell apart, and the world’s major currencies began to float against each other.

…

The financial community will welcome neither of these two options, but it is not as if the other options on the table are great for them either. Those alternative choices are, first, what is known as financial repression, and second, a renewed effort to seriously collect taxes on a global scale. These efforts to get us out of this mess may not be popular, but one, or both, is coming.
The End of Banking
The story of the crisis reconstructed in chapters 2 and 3 can, and perhaps should, be seen in a bigger context. At the end of the Bretton Woods era, when the United States finally went off gold in 1971, states around the world had to adjust to what Eric Helleiner has called “the reemergence of global finance.”3 Floating exchange rates, deregulation, disintermediation, and the rest, which made finance the most profitable sector of the American and British economies by the 2000s, was the new order of things. But what was it all really based upon?

…

Friedrich describes him as “the spokesman for the creed of the neo-liberals in German and European politics.” Freidrich, American Political Science Review 49, 2 (1955): 510.
29. I thank Josef Hien for the details on this important transition period.
30. See the description of the Wirtschaftwunder at http://en.wikipedia.org/wiki/Wirtschaftswunder.
31. Allen, “Underdevelopment,” 271. The fact that all of this was made possible by an astonishingly favorable macroeconomic context—the Bretton Woods international monetary system and American acceptance of an undervalued Deutschmark given Germany’s strategic position in the Cold War—should also be acknowledged. It seldom is, however, especially among German policy makers.
32. Allen, “Underdevelopment,” 271 and 268.
33. Ibid., 277.
34. Ibid., 281.
35. Peter J. Katzenstein, ed., Between Power and Plenty (Ithaca, NY: Cornell University Press, 1976).
36.

In fact, there’s another side of the story which is known to economists but is barely reported. That is that even the major economic indicators have deteriorated since the reforms began worldwide. A couple of years ago there was a Bretton Woods commission headed by Paul Volcker, the former head of the Federal Reserve Board, and a very respectable figure in the profession. Their report came out about five years ago.32 They studied what had happened to the global economy and the U.S. economy since the so-called reforms were instituted in the early 1970s, when the post-World War II Bretton Woods system was dismantled. Their conclusion was that in the industrial countries economic growth had declined by half. It was still growth, but half the rate of the previous period. Other studies make it about two-thirds.

…

Its last annual report said that we have to approach these questions with “humility,” because nobody has a clue as to what’s going on.46 Jeffrey Sachs, an economist at Harvard, said in a recent article that we have to recognize that the international economy is “dimly understood.”47 In fact, every international economist who is even semihonest tells you, We don’t really understand what’s going on, but we have some ideas. So anything that’s said—certainly anything that I say—you want to add many grains of salt to, because nobody really understands.
However, some things are moderately clear and there’s a fair consensus. Through the Bretton Woods era—roughly from the end of the Second World War up to the early 1970s—exchange rates were pretty close to fixed and capital was more or less controlled. So there weren’t extreme capital flows. That was changed in the early 1970s by decision. Capital flow was liberalized. There have been associated events, maybe consequences, maybe not. The humility comes back. Associated with this period of liberalization of capital has been a number of things.

Investors and lenders can “vote” by capital flight, attacks on currencies and other devices offered by financial liberalization. That is one reason why the Bretton Woods system established by the United States and Britain after World War II instituted regulated currencies and permitted capital controls.
The Great Depression and the war had aroused powerful radical democratic currents, ranging from the anti-fascist resistance to working-class organization. These pressures made it necessary to permit social democratic policies. The Bretton Woods system was designed in part to create a space for government action responding to public will—for some measure of democracy, that is.
John Maynard Keynes, the British negotiator, considered the most important achievement of Bretton Woods to be establishment of the right of governments to restrict capital movement. In dramatic contrast, in the neoliberal phase after the breakdown of the Bretton Woods system in the 1970s, the U.S.

…

In dramatic contrast, in the neoliberal phase after the breakdown of the Bretton Woods system in the 1970s, the U.S. Treasury now regards free capital mobility as a “fundamental right,” unlike such alleged “rights” as those guaranteed by the Universal Declaration of Human Rights: health, education, decent employment, security and other rights that the Reagan and Bush administrations have dismissed as “letters to Santa Claus,” “preposterous,” mere “myths.”
In earlier years the public had not been much of a problem. The reasons are reviewed by Barry Eichengreen in his standard scholarly history of the international monetary system. He explains that in the nineteenth century, governments had not yet been “politicized by universal male suffrage and the rise of trade unionism and parliamentary labor parties.”

…

He explains that in the nineteenth century, governments had not yet been “politicized by universal male suffrage and the rise of trade unionism and parliamentary labor parties.” Therefore the severe costs imposed by the virtual parliament could be transferred to the general population.
But with the radicalization of the general public during the Great Depression and the anti-fascist war, that luxury was no longer available to private power and wealth. Hence in the Bretton Woods system, “limits on capital mobility substituted for limits on democracy as a source of insulation from market pressures.”
The obvious corollary is that after the dismantling of the postwar system in the 1970s, democracy is restricted. It has therefore become necessary to control and marginalize the public in some fashion, processes particularly evident in the more business-run societies like the United States. The management of electoral extravaganzas by the public relations industry is one illustration.

Many are under British jurisdiction, and he should combine with France’s President Sarkozy—rotating head of the EU until Christmas—to insist that Britain join with the rest of the world to constrain if not eliminate an important source of financial destabilization.
I would like the U.S. to consider going back to Bretton Woods basics—unfashionable though it may seem. It was not just Lyndon B. Johnson who opened the way to the Republicans’ “Southern Strategy” and nearly 40 years of conservative dominance: It was also Nixon’s abandonment of government-led economic disciplines through his suspension of Bretton Woods fixed exchange rates. Obama should propose the end of floating exchange rates and argue for a system of managed rates between the euro, dollar and yen to bring back more pre-dictability into the system. The American, EU and Japanese governments would undertake, as in Bretton Woods I, whatever economic action is needed to maintain stability between their exchange rates. There would also be explicit rules on exchange rate rigging—a more effective way of tackling the China issue than threatening it with tariffs.

…

The EU has forced the pace by declaring that the summiteers should come up with answers by the end of next February. The Obama team is compelled to engage.
Nonetheless, it is an ambitious deadline. It took nearly two years of discussion before there was sufficient agreement to attempt the 1944 Bretton Woods Conference in New Hampshire that famously established the post-war international financial system and to which the current summit process is being compared. But shared awareness that the system is broken and that the world risks a credit-crunch-induced global depression is concentrating minds wonderfully.
Where to start? The architects of Bretton Woods I knew they had to avoid the beggar-my-neighbor policies of the 1930s—economic autarchy and hyper-militarization—and that if the U.S. and Britain could clinch a deal, then everybody else would have to follow. Even then it was a struggle.

…

The U.S. only agreed to the I.M.F. managing a system of fixed exchange rates if in effect the U.S. ran it. The dream of creating a system of global financial governance was passed up. Realpolitik had triumphed.
The system then only lasted as long as the Americans thought the benefits of running it outweighed the costs. When in 1971 the Nixon administration was faced with the choice of increasing taxes to finance the Vietnam War or abandoning the Bretton Woods fixed-exchange-rate system that delivered pre-dictability and less risk in international financial relationships, it had no hesitation. The markets would do the job instead—and if other governments did not like the new risks, tough.
For a long time, it looked as though private markets could step into the breach—recycling first petrodollars in the 1970s and then Asian dollars back into the global system.

—Niall Ferguson
Made in China
If the monetary policy of Bulgaria is inflationary, the rest of the world doesn’t even shrug. If the fiscal policy of Bolivia is reckless, the global economy is unaffected. Not so with the United States. Since the end of World War II, the U.S. dollar has been the reserve currency of the world. Just as central banks including our own once held gold and issued their currencies as a marker for gold, under the Bretton Woods agreement, foreign central banks have held U.S. dollars against which they issue their own currencies. Despite the abrogation of the U.S. promise of dollar /gold redeemability, the dollar standard has persisted. Almost two thirds of foreign currency reserves are held in dollars. As the world’s leading reserve currency, the advantages for the United States are several. This dollar standard results in greater market demand for dollars and therefore a higher exchange rate than would otherwise exist.

…

Making the federal guarantee of the agencies’ bonds explicit in the face of the stock collapse shows concern for the bondholders, Chinese and Japanese among them. Ironically, however, except for inflation, those guarantees can only ever be effected by borrowing more money from . . . places like China and Japan! America’s bankers have a problem.
Brand Name America
Just as the costs of the Vietnam War were instrumental in the collapse of the Bretton Woods gold exchange monetary system, Bush’s elective war in Iraq will be noted as the straw that broke the dollar standard that has prevailed since 1971. There was always something inherently unstable about the neoconservative fantasy of a “unipolar world.” Empires do extend themselves into collapse. But it was more than just the dollar cost of war and empire. There were other consequences, harder to calculate but nonetheless real.

…

“Maybe we can price the oil in the euro,” said OPEC secretary-general Abdalla El-Badri in an interview that suggested member nations had been having lively discussions about a pricing change.
One has to suspect that a pricing change might not be gradual in the face of escalating dollar inflation. Just as supermodel Gisele Bündchen may have preferred to be paid in euros, during the inflation of the 1970s singer Bette Midler demanded payment in gold South African Krugerrands to perform overseas. When it was inevitable that the Bretton Woods dollar gold exchange standard couldn’t last, France could send warships to pick up its gold in New York. Under the existing dollar standard, there is nothing to pick up. Those that get out early can preserve their capital; others will be left holding the “IOU Nothing.”
There is reason to believe that Persian Gulf region money is moving out of dollars and into gold. In November 2008, Gulfnews.com reported a two-week Saudi gold buying spree of about $3.5 billion.

Stated simply, the first major decline in the value of the dollar had nothing to do with the Fed. So incensed was Fed Chairman Eugene Meyer by FDR’s decision that he actually resigned.6
Let’s shift to 1944 and the Bretton Woods monetary conference at the Mount Washington Hotel. The U.S. delegation was led by members of the U.S. Treasury; assistant secretary Harry Dexter White was the lead U.S. delegate. With the dollar pegged to gold at 1/35th of an ounce, the currencies of the free world would peg theirs to a dollar that had a stable definition. At least from the standpoint of the United States, the global currency agreement, per Benn Steil’s The Battle of Bretton Woods (2013), was largely a creation of the Treasury and the Roosevelt White House.7
And while there were sometimes large wiggles in the dollar price of gold in the aftermath of 1944, the dollar was defined as 1/35th of an ounce right up until 1971.

Perhaps even more interesting about the Austrian critique of the Fed in the 1920s, and the strange supposition that it was the cause of the Roaring Twenties boom, is that in isolation, the Fed was “tight.” This isn’t to say that credit created in the real economy sat idle thanks to the Fed, but it is to say that the Fed itself, worried in Austrian fashion about too much credit creation, actually attempted to slam on the brakes. As economic historian Benn Steil recalls about the 1920s Fed in The Battle of Bretton Woods (2013), a history of the steps that led to the post–WWII gold standard:
Unlike the Bank of England in the late nineteenth century, the U.S. Federal Reserve of the 1920s simply did not follow the cardinal rule of the gold standard—that is, to expand credit conditions when gold flowed in, and contract them when gold flowed out. It frequently did the opposite.11
The availability of credit in an economy is a function of production in same, and investor excitement about production in same.

Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages
by
Carlota Pérez

The event in question, though apparently small and relatively isolated,
is experienced by the pioneers of the time as the discovery of a new territory,
as a powerful announcement of what those technologies can offer far into the
future and as a call for entrepreneurial action.
By contrast, any attempt at indicating an ending date for each revolution
would be relatively meaningless. It is true that certain events can be felt by
society as announcing the ‘end of an era’, such as the 1973 oil crisis and the
1971 breakdown of the Bretton Woods agreement on the dollar. Nevertheless,
as will be discussed in the next chapter, each set of technologies undergoes a
difficult and prolonged period of stretching when the impending exhaustion of
its potential becomes increasingly visible. This phenomenon is crucial to the
present interpretation. When each technological revolution irrupts, the logic
and the effects of its predecessor are still fully dominant and exert powerful
resistance.

…

The Turning Point: Rethinking and Rerouting Development
The notion of a ‘turning point’ is a conceptual device to represent the fundamental changes required to move the economy from a Frenzy mode, shaped
by financial criteria, to a Synergy mode, solidly based on growing production
capabilities. The turning point then is neither an event nor a phase; it is a
process of contextual change. It can take any amount of time, from a few months
to several years, it can be marked by clear-cut events such as the Bretton Woods
meetings, enabling the orderly international Deployment of the fourth surge,
or the repeal of the Corn Laws in Britain, facilitating the Synergy of the second. It could also be happening in the background with a series of changes that
seem to come together as deployment begins.
The turning point has to do with the balance between individual and social
interests within capitalism. It is the swing of the pendulum from the extreme
individualism of Frenzy to giving greater attention to collective well being,
usually through the regulatory intervention of the state and the active participation of other forms of civil society.

…

Hours of work, salaries, health, social security, protection, the
risk of invalidity and old age pensions stopped being a personal issue’ and
became more and more a responsibility taken up by the state.211
For the full development of the Age of the Automobile, a wide range of
institutions was set up. Many of them were to put order in international finance,
investment and trade: The International Monetary Fund (IMF), the World Bank,
the Bank of International Settlements (BIS), the Marshall Plan and supervisory
agencies, the reserve role assigned to the US dollar in the Bretton Woods
accords, the General Agreement on Tariffs and Trade (GATT) and others. Many
more were to establish an orderly framework at the national level: Keynesian
policies, separate regulatory bodies for banks, securities, insurance, savings
(to avoid the mixed financial services that allowed risking people’s savings in
209. On the crucial importance of this for the deployment of the paradigm, see Lloyd-Jones and
Lewis (1998).
210.

After all, there is no fully endorsed international criminal court; the one in The Hague isn’t recognized by Washington. The international realm exists in a state of quasi anarchy—a perfect fit for borderless cryptocurrencies.
Some international agreements do stick, such as the Bretton Woods system of pegged currencies established in 1944 amid the crisis of World War II (and ended when President Nixon squelched the gold standard in 1971). Might a cryptocurrency crisis goad governments into another such sweeping agreement? A Bretton Woods II? Those who’ve dreamed of the IMF’s playing an intermediary role in international commerce, who’ve wanted to free the world of its unhealthy dependence on the dollar and to reduce the excessive influence of the Fed and U.S. Treasury, might suddenly feel empowered. The Chinese and the French, who’ve pushed to have the IMF’s Special Drawing Rights elevated from their current role as mere units of accounting to becoming an international reserve currency for storing central bank deposits, might have themselves a new cause.

…

Some of the more cryptocurrency-friendly states: The Web site BitLegal offers comprehensive reports on the legal status of bitcoin around the world, http://www.bitlegal.net/index.php.
Wences Casares, the CEO of bitcoin wallet: Interviewed by Michael J. Casey, September 12, 2014.
Zurich-based investment manager and high-tech: Richard Olsen, interviewed by Michael J. Casey, December 11, 2013, and June 13, 2014.
when the dollar goes digital, “national borders are”: Eswar Prasad, interviewed by Michael J. Casey, February 7, 2014.
such as the Bretton Woods system of pegged: M. J. Stephey, “Bretton Woods System,” Time, October 21, 2008, http://content.time.com/time/business/article/0,8599,1852254,00.html.
“If suddenly the entire world starts”: Roger Ver, speaking at the North American Bitcoin Conference, Miami Beach, January 26, 2014.
Index
The index that appeared in the print version of this title does not match the pages in your e-book. Please use the search function on your e-reading device to search for terms of interest.

…

Britain—led by the economist John Maynard Keynes—wanted an internationally based solution to be run by the newly created International Monetary Fund. But in the end, the United States, as the only major power not devastated by war and with its currency now globally dominant, called the shots. The U.S. dollar became the central pole around which the global economy would function. It remains so today.
The pact signed at the Bretton Woods Conference in 1944 repegged the dollar to gold and then got the rest of the world to peg their currencies to the dollar. Foreign governments holding reserves in dollars were given the right to redeem them in gold at a fixed rate. It worked as a financial stabilizer for two and half decades, but by the late 1960s the system’s own constraints—in this case imposed directly on the Fed—made it unsustainable.

For a thorough historical account of the events and the protagonists at
the Bretton Woods Conference, see Armand Van Dormael, Bretton
Woods: Birth of a Monetary System (London: Macmillan, 1978). For a
historical account that gives a broader view of the comprehensive U.S.
preparation for hegemony in the postwar period by posing the economic
planning at Bretton Woods together with the political planning at Dumbarton Oaks, see George Schild, Bretton Woods and Dumbarton Oaks:
American Economic and Political Postwar Planning in the Summer of 1944
(New York: St. Martin’s Press, 1995).
Giovanni Arrighi, The Long Twentieth Century (London: Verso, 1994),
p. 278–279.
On the international ﬁnancial crisis that began in the 1970s with the
collapse of the Bretton Woods mechanisms, see Peter Coffey, The World
Monetary Crisis (New York: St.

…

Capitalist Response to the Crisis
As the global conﬂuence of struggles undermined the capitalist and
imperialist capacities of discipline, the economic order that had
dominated the globe for almost thirty years, the Golden Age of
U.S. hegemony and capitalist growth, began to unravel. The form
and substance of the capitalist management of international development for the postwar period were dictated at the conference at
Bretton Woods, New Hampshire, in 1944.8 The Bretton Woods
system was based on three fundamental elements. Its ﬁrst characteristic was the comprehensive economic hegemony of the United
States over all the nonsocialist countries. This hegemony was secured
RESISTANCE, CRISIS, TRANSFORMATION
through the strategic choice of a liberal development based on
relatively free trade and moreover by maintaining gold (of which
the United States possessed about one third of the world total) as
the guarantee of the power of the dollar.

…

Reform in
the dominant capitalist countries could thus be ﬁnanced by a surplus
of exports to the United States and guaranteed by the monetary
system of the dollar. Finally, Bretton Woods dictated the establishment of a quasi-imperialist relationship of the United States over
all the subordinate nonsocialist countries. Economic development
within the United States and stabilization and reform in Europe
and Japan were all guaranteed by the United States insofar as it
accumulated imperialist superproﬁts through its relationship to the
subordinate countries.
The system of U.S. monetary hegemony was a fundamentally
new arrangement because, whereas the control of previous international monetary systems (notably the British) had been ﬁrmly in
the hands of private bankers and ﬁnanciers, Bretton Woods gave
control to a series of governmental and regulatory organizations,
including the International Monetary Fund, the World Bank, and
ultimately the U.S.

As that consensus began to unravel in the 1970s with the failure of the Bretton Woods system of fixed but adjustable exchange rates, countries slowly moved away from capital controls to the world we’re now living in. In a world of constant financial innovation, it became increasingly difficult to impose capital controls successfully. Moreover, capital controls allowed countries to pursue bad domestic policies for too long, ultimately to their own detriment.
Nevertheless, the abolition of capital controls has hardly been plain sailing. Some economists foresaw the problems associated with newly liberalized capital markets. James Tobin (1918–2002), for example, suggested in 1972 a (now-eponymous) tax – to be paid on foreign-exchange transactions – to limit speculative cross-border capital flows. He feared that the failures of Bretton Woods would be replaced by anarchy in the capital markets.

…

That, I believe, is a false distinction. The distinction was made because the credit crunch that began in 2007 cried out for a global solution; for a while, then, there was a commonality of interest.
History suggests, however, that commonalities of interest do not last very long. Until and unless the G20 is able to confront the difficulties outlined in this book, it is likely to head the same way as the League of Nations and the Bretton Woods exchange-rate system – in other words, into the dustbin of history. The G20 doesn’t really have the teeth to offer the international rule of law which was, in effect, forced upon the world by the imperial powers in the nineteenth century.
What might a new international order begin to look like? Already, there are clues dotted around the world. I suspect governments will increasingly use their influence to conduct foreign policy through their influence on international markets, encouraging the creation of bilateral relationships that appear to be driven by commercial interests but which, in reality, are an important part of modern-day realpolitik.

…

That rethink must involve a better understanding of the role of emerging nations in determining inflation, both in the emerging world and in the West.1
BACK TO THE 1970S
For those brought up in the 1970s, the achievement of price stability became the big macroeconomic prize. During that decade, one economic disaster followed another, largely because there was no monetary discipline and, hence, no anchor for inflationary expectations. The commodity price surge at the beginning of the 1970s came about partly because the US over-stimulated demand in a bid to fund the Vietnam War. The collapse of the Bretton Woods exchange-rate system, and the volatility that followed, reflected the willingness to tolerate inflation as the ‘acceptable’ cost of delivering a low rate of unemployment. The quadrupling of oil prices at the end of 1973, as a consequence of the Arab oil embargo (itself a reaction to the Yom Kippur War), was only possible because the inflation genie was already out of the bottle. As inflation – and expectations of inflation – picked up, so industrial relations deteriorated, creating a legacy of strikes, huge wage and price increases and the beginnings of so-called ‘stagflation’, whereby inflation went up but economic growth and employment came down.

Ordinary members of the public hear much more about the equity market—the “stock market”—in the news and general chatter, but the bond market is much bigger and more important, in global financial terms: as an investor tells Michael Lewis in The Big Short, “The equity world is like a fucking zit compared to the bond market.”23
Bretton Woods The setting for a conference in July 1944 where the Allies set out the agreement to regulate international economic relations after the war. Countries agreed to fixed exchange rates, tied to the US dollar, which in turn was tied to the ownership of actual, physical gold; the conference also agreed to the creation of the International Monetary Fund and the International Bank of Reconstruction and Development, which was to become the World Bank. The specific aim of the conference was to avoid the “beggar thy neighbor” policies between states that had played such a role in the turmoil of the twentieth century. The Bretton Woods system lasted from 1945 until President Nixon unilaterally took the USA off it on 15 August 1971, an event known as the “Nixon shock,” which reintroduced free-floating currencies.

…

Gold does not tarnish, is portable but satisfyingly heavy, looks attractive, is fungible or easily interchangable, and is very hard to mine—that’s a virtue, for a currency, because it means there’s no easy way for someone to find loads of it and make the value decline. All the gold in the world would fit in a cube roughly twenty meters on each side. Those reasons add together to make gold historically the most popular underpinning for coinage and thence for paper money and modern currencies. Gold hasn’t played this role globally since 1971, when President Nixon ended the Bretton Woods system, in which the US dollar was underpinned by gold reserves and linked to foreign currencies through fixed exchange rates. The value of gold sharply declined after that, losing two-thirds of its value, but in the noughties, as global uncertainties rose, gold had an extraordinary ten years, surging in price from $271 an ounce in 2001 to a peak of more than $1,800 in 2011. The explanation for that is that “gold is where money goes when it’s scared.”

…

By November 1923, a dollar was worth 630 billion marks, a loaf of bread cost 140 billion marks, and Germany was disintegrating under the strain. The result was the destruction of German society as it was then constituted, which led directly to the rise of the Nazis—a history that needs to be borne in mind whenever it seems the Germans are being a bit uptight about holding the line against inflation in the euro zone.
IMF The International Monetary Fund. This is the organization, created by the Bretton Woods agreement, that takes money from member countries and disburses it to countries in need of a cash injection, always with strict conditions attached. The IMF insists on sharp crackdowns on public spending, removing price controls, privatizing state-owned businesses, and liberalizing trade. To countries on the receiving end of this process, it sometimes seems as if the IMF imposes an off-the-shelf kit of solutions regardless of local history and difficulty and circumstance.

Their efforts to develop and to improve living standards provided further impetus for global expansion, but despite their new freedom, most initially found themselves continuing to provide raw materials, investment outlets, markets, and cheap labor for the industrialized countries of the West.
The international monetary order and infrastructure of postwar economic expansion was provided by the Bretton Woods Agreement of July 1944. Bretton Woods sought to ensure that there would be no return to the conditions of the Great Depression, especially the collapse of growth, employment, and international trade, and the rise of protectionism that accompanied it. The focus was on establishing free trade based on the convertibility of currencies with stable exchange rates. In the past this problem had been solved through the gold standard, whereby the government or central bank of a country guaranteed to redeem notes upon demand for a fixed amount of gold.

…

The West, moreover, did not want to confer any advantage on the communist Soviet Union, which controlled a sizeable proportion of known gold reserves and had emerged as a geopolitical rival to the US. Bretton Woods therefore established a system of fixed exchange rates using the US dollar as a reserve currency. The dollar was to have a set relationship to gold, at US$35 an ounce, and the US government committed to converting dollars into gold at that price. Other countries would peg their currencies to it, giving the US an unprecedented influence in the global economy that exists to this day. Supreme as the world's currency, the dollar was now as good as gold.
Bretton Woods also established the International Bank for Reconstruction and Development (better known as the World Bank) and the International Monetary Fund (IMF). Together with the 1947 General Agreement on Tariffs and Trade (or GATT), which evolved into the World Trade Organization, and the United Nations, which in 1945 succeeded the League of Nations, these institutions promoted relative stability in the world economy.

…

In October 1973, Arab members of the Organization of the Petroleum Exporting Countries (OPEC) proclaimed an oil embargo, in response to US backing for Israel during the Yom Kippur War and in support of the Palestinians. The price of oil rose from US$3 per barrel to nearly US$12. In 1979, in the wake of the Iranian revolution, oil output fell and the price rose to nearly US$40 per barrel. This resulted in higher inflation and a sharp global economic slowdown.
This decade saw the collapse of the Bretton Woods international monetary system. The cost to the US of the Vietnam War and the Great Society programs had spurred sharp increases in prices, along with large budget deficits and increased dollar outflows to pay for the expenditures. Fearing devaluation of the US currency relative to the German Deutsche Mark and the Japanese yen, traders sought to change dollars into gold. By the early 1970s, dollar holders had lost faith in the ability of the US to back its currency with gold, as the ratio of gold available to dollars deteriorated from 55 percent to 22 percent.

The essential was trade liberalization, and that could not be managed unless there were some means of payment, i.e. recognition of the various paper currencies. The old Bank for International Settlements at Basle in Switzerland - originally set up to handle the Reparations payments of the First World War - was revitalized, with a European Payments Union (in 1950). This again followed an Atlantic example. In 1944, at Bretton Woods in New Hampshire, the Americans and British had developed institutions that were meant to stop the collapse of world trade that had occurred in the Great Slump of the 1930s. The collapse - two thirds - had been a disaster, causing unemployment in millions and millions, and bringing dictatorships in dozens, the worst of them Hitler’s. A chief reason for the disaster had been monetary - the loss of a common standard of exchange, in this case gold, when the British ran out of reserves and neither the Americans nor the French, who had gold, would move in to support the system.

…

The outstanding feature of post-war Europe was of course the ‘German economic miracle’: the moonscape of 1945 had been utterly transformed. As the Treaty of Rome took effect on 1 January 1958, the various restrictions on money exchange were dismantled, and the dollar could invade any market that its owners chose. Now, the institutions that had been thought up towards the end of the war came into their own: ‘Bretton Woods’ to run world trade and foreign exchange, through the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade (GATT), which regularly assembled to discuss the liberation of commercial exchange. The European Payments Union lost its function, though the Bank for International Settlements at Basle in Switzerland carried on as a sort of catch-all institution.
Here was an enormous and essential difference with the post-war of 1919.

Gao Xiqing continues, “‘If China has
$2 trillion, Japan has almost $2 trillion, and Russia has some, and all the
others, then—let’s throw away the ideological differences and think about
what’s good for everyone.’ We can get all the relevant people together
and think up what people are calling the second Bretton Woods system,
like the first Bretton Woods convention did.”33 The replacement might
be gold-based, especially if China has a say in the matter, but the United
States would be ill advised not to monetize its debt first, since there is
nothing stopping it from doing so. It is also possible, but not desirable,
that there would be a system such as between 1934 and 1971 (bracketing the Bretton Woods era) when international transactions occur in currency backed by gold, but paper dollars would continue to be used for
legal tender domestically. But instead in the April 2009 G-20 meeting the
idea was floated that a new reserve currency might be constructed using
a basket of currencies including the ruble and the yuan.

…

Instead it became
the highest and in fact dominant bidder in the world market for gold,
and exhibited a crazed preference for the metal. The price increase
from $20.67 to $35 triggered a mining boom, and the United States
bought more than the total production of the world’s mines through
the Great Depression. By the early 1950s, the United States would own
three-fourths of all monetary gold and half of cumulative world production since the beginning of time.50 The establishment of pegged
exchange rates in the Bretton Woods Agreement of 1944 could be seen
as a global gold-exchange standard pyramiding all the world’s money
upon gold held by the United States, placing America in a position not
unlike that of Britain at the height of its empire. Ironically, from that
moment forward, the United States mimicked the actions of its aging
parent, repudiating this backing of its currency and providing a beacon
for the world to follow it down the path of adopting a purely paperbased currency system.

…

While by 1933 specie’s share of the money supply (M2)
had dropped to 1.9 percent from 5.3 percent in 1913, when combined
Flat-Earth Economics
89
with gold or silver notes, overall hard-backed currency still comprised
58 percent of currency in circulation.12 13 In the context of competitive
devaluations from other countries, Roosevelt’s new U.S. peg may be
understandable, but the government predation that occurred simultaneously is not.
The torch for hard money, long carried by the Democratic Party,
completely burned out by the end of the interwar period. After World
War II, the Bretton Woods system would stabilize exchange rates, but
domestic money creation would become nearly completely elastic.
The grand success of the Marshall Plan era contrasted pleasantly with
the sudden boom-bust cycle that followed World War I. Many if not
most current day economists look at the increase in money supply in
the late 1930s, which stemmed mostly from the monetization of government debt issued to fund the New Deal, as the impetus of the
economic recovery.

“Nixon agreed but said that it would first promote economic growth and assure that the economy was expanding before the 1972 election. I replied that it might not be worth winning the election at the cost of a major inflation subsequently. Nixon said something like, ‘We’ll worry about that when it happens.’”26
In August 1971, Nixon brought to an end the Bretton Woods fixed-currency regime. If Friedman, an inveterate opponent of Bretton Woods, was given cause to celebrate, it was short-lived: Nixon also imposed a legally binding price and income freeze. “The last time I saw Nixon in the Oval Office, with George Shultz,” Friedman recalled, “President Nixon said to me, ‘Don’t blame George for this silly business of wage and price control.’ . . . I said to him, ‘Oh, no, Mr. President, I don’t blame George, I blame you.”27 Friedman blanched at Nixon’s record: he had failed to cut federal spending as a percentage of national income and introduced rules governing the environment to a raft of new government agencies.

…

Once that battle was lost, however, Keynes readjusted his thoughts to accommodate the new conditions and concluded that there was some virtue in harnessing all currencies to a single common measure, such as gold, once the turbulence in the world economy caused by World War I had passed.
In A Treatise he went one stage further, proposing the formation of a new mechanism to link currencies together, a “Supra-national Central Bank,” a notion that would come to fruition in the Bretton Woods fixed-currency exchange agreement of 1944. Instead of fixing currencies to the price of gold, which Keynes argued was in reality little more than fixing them to the dollar, he proposed in A Treatise that it would be more equitable if currencies were aligned to a basket of sixty key internationally traded commodities and allowed to float annually up to 2 percent either side of their pegged value.

…

So we became personally very great friends, including Lydia Lopokova.”27
In August 1940, Keynes was given an unpaid Treasury job that allowed him to rove across all areas of economic policy. In particular, he was asked to negotiate war loans from America. He developed plans for a postwar economic order to replace the unbridled competition between nations that had fomented the war, and he invented a more orderly system of currency trading fixed around a revived gold standard, what became the Bretton Woods agreement. He was also instrumental in conceiving two other pivotal organizations, the International Monetary Fund and the World Bank.
Hayek, meanwhile, set out on his pessimistic masterwork, The Road to Serfdom.28 As his biographer Alan Ebenstein observed, “‘The Road to Serfdom’ revolutionized Hayek’s life. Before its publication, he was an unknown professor of economics. A year after it was published, he was famous around the world.”29 Not bad for a book that Hayek, with rare modesty, believed only a few hundred would read.30
Hayek had written to Walter Lippmann in 1937, “I wish I could make my ‘progressive’ friends here understand that democracy is possible only under capitalism and that collectivist experiments lead inevitably to fascism.”31 Originally titled “The Nemesis of the Planned Society,” the book drew on ideas Hayek had explored in two essays in 1938 and 1939, that those who advocate a planned economy in place of a free market are, however well intentioned, treading a path that could lead to tyranny.

The Fed Demystified
A WORLD RESTORED: THE DOLLAR BECOMES THE
NEW GOLD
The Conference held at the Bretton Woods Hotel in New Hampshire
during 1944 was a blend of British brain and American brawn acting
to put the world economy back together. Keynes had the plan, and
the United States had the money.
The big idea was to turn the U.S. dollar into the global reserve currency, meaning the money that all central banks paid each other in to
settle the ‘‘balance of payments’’ mismatches that always arose from
cross-border trade and investment. Under the old gold standard, the
global reserve currency was the British Pound but only because it was
fully convertible to gold at a fixed rate. The new Bretton Woods system pegged each country’s currency to the U.S. dollar within a fixed
range and in turn pegged the dollar to gold.

…

In 1971, the level and trend of inflation (which is to say,
erosion of the real value of the dollar) had reached the point where
the United States was experiencing a classic gold drain. Remember,
under Bretton Woods, all currencies were pegged to the dollar and
the dollar to gold. Foreign countries were getting tired of selling their
stuff to the United States for dollars that kept shrinking. They increasingly demanded to convert their dollar reserves into gold. Since U.S.
gold reserves were a tiny fraction of the dollars we had pumped overseas to buy everything from oil to whole companies, this could not go
on very long.
Nixon’s solution was to unilaterally dump the Bretton Woods system that had underpinned post-war recovery and growth. The United
States severed the link between the dollar and gold by closing the
‘‘gold window’’ that allowed other countries to swap dollars claims
for gold bullion.

…

So, he launched the Great Society and the War on Poverty, vastly
increasing the size and spending of the federal government in the
process. At the same time, he expanded the war in Vietnam, which he
inherited from Kennedy.
This explosion in federal spending was unlike those of the Roosevelt years in one key aspect. They were not nearly as fully financed by
taxation. The United States, of course, could always ‘‘print dollars,’’
since the dollar had become the ‘‘new gold’’ under Bretton Woods.
So, massive U.S. deficits and government borrowing could be inflated
away at the expense of our trading partners and holders of U.S.
bonds. The U.S. example spread to places like the U.K. that needed to
kick-start sluggish economies. This was not a partisan political thing,
either. Richard Nixon won power in 1968 and maintained high levels
The Natural History of Financial Folly
of spending on domestic programs and the Vietnam War.

pages: 182words: 53,802

The Production of Money: How to Break the Power of Banks
by
Ann Pettifor

We do that without any promise that offshore, mobile private wealth will reciprocate by contributing their fair share to the taxation system.
These tensions between private financial interests and society as a whole have throughout history been manifest in struggles for control over the money production system. Only intermittently has society succeeded in asserting democratic management of the system, by subordinating the interests of private wealth to wider interests. The Bretton Woods era (1945–71) was a time during which the private banking and finance sector acted as servant to and not master of the economy. Thanks largely to John Maynard Keynes’s theories, his understanding of the monetary system, and to the implementation of his monetary policies during this period, the financial system was made to work largely in the interests of wider society.
However from the 1960s onwards, private wealth, led largely by private bankers, in collusion with elected politicians, began again to wrest control of the monetary system away from the regulatory democracy of governments.

…

Under the Tripartite Agreement, the British and US governments had agreed to support the French exchange rate so that monetary reform was global and cooperative. Public authority over finance and cheap money prevailed over the greater part of the world.
The modern age
With the exception of the five years of the 1945 Labour government in Britain, the decisiveness of this re-alignment of class interests was ruptured in the post-war age. The most obvious statement of intent was the United States’ rejection at the 1944 Bretton Woods Conference of the British Government’s proposal for Keynes’s International Clearing Union (ICA). The ICA was to be a global, independent bank that would hold all international reserves and would manage and ‘clear’ all debiting and crediting payments between countries, and by that means determine changes in exchange rates. Instead, to reflect the hegemonic role the United States played in a world ruined by war, the US dollar was given a central role in the post–World War II world.

…

Sir Peter Middleton, permanent secretary to the Treasury from 1983 to 1991, described the mood there when he first joined in 1960:
It was a period of confidence and consensus in the Treasury. A post-war deflation had been avoided. The commitment in the wartime White Paper to employment policy to maintain a high and stable level of employment had been achieved to an extent greater than anyone expected – and was reiterated both in the 1956 White Paper on the economic implications of full employment and in the Radcliffe Report in 1959. We had lived within the Bretton Woods arrangements – a little precariously at times but successfully.14
But the achievement of full employment was disregarded by economists and policymakers then, much as it is disregarded today: as a non-event. They promoted instead an agenda based on ‘growth’ and financial liberalisation.
From the early 1960s with full unemployment at 2 percent, British policymakers echoed the OECD in setting an explicit target for real annual ‘growth’ of 4 percent.

It sought decolonisation and the dismantling of former empires (British, French, Dutch, etc.) and brokered the birth of the United Nations and the Bretton Woods Agreement of 1944 which defined rules of international trade. When the Cold War broke out, the US used its military might to offer (‘sell’) protection to all those who chose to align themselves with the non-communist world.
The United States, in short, assumed the position of a hegemonic power within the non-communist world. It led a global alliance to keep as much of the world as possible open for capital surplus absorption. It pursued its own agenda while seeming to act for the universal good. The support the US offered to stimulate the capitalist recovery in Europe and Japan immediately after the Second World War was an example of such a strategy. It ruled by a mix of coercion and consent.
At the Bretton Woods conference of 1944, the British negotiator, the renowned economist John Maynard Keynes, had sought a global currency unit outside of any one nation’s control.

…

Then send it to the United States, Argentina or South Africa where it can be profitably deployed. Surplus capital in Taiwan? Then send it to create sweatshops in China or Vietnam. Capital surpluses in the Gulf States in the 1970s? Then send them to Mexico via the New York investment banks.
For all of this to happen effectively ultimately requires the creation of state-like international institutions such as those set up under the Bretton Woods Agreement to facilitate and regulate the international flows of capital. The World Bank and the International Monetary Fund, along with the Bank of International Settlements in Basel, are central here, but other organisations, such as the Organisation for Economic Co-operation and Development (OECD) and the G7 (later the G8), now expanded to the G20, also play an influential role as the world’s central banks and treasury departments seek to coordinate their actions to constitute an evolving global financial architecture for an international version of the state–finance nexus.

…

The geographical variations in institutional arrangements are considerable and the mechanisms for inter-state coordination, such as the Bank of International Settlements in Basel and the International Monetary Fund, also have an influential role. The powers involved in the construction of arrangements such as those that assembled to make key international decisions on the future financial architecture of the world trading system, as at Bretton Woods in 1944, are typically élite, expert, highly technocratic and undemocratic. And so it continues in our own times. Only those initiated into the secret ways are being called upon to correct them.
Broad-based political struggles do take place, however, over and around the state–finance nexus. More often populist than class-based, these protests typically focus on the actions of that class faction that controls the state–finance nexus.

By contrast, a fiscal policy based on a correct understanding of the nature of money would only call for austerity measures if the economy were facing inflationary pressures.
Money and monetary policy
We observed earlier that the orthodox view of money is particularly concerned that an exogenously determined excess amount of money in the economy will lead to inflation. As Marvin Goodfriend has put it in relation to the ending of the gold-dollar standard underpinning international monetary relations in the early 1970s: ‘With the collapse of Bretton Woods, for the first time in modern history, all the world’s currencies were de-linked from gold or any other commodity. The lack of any formal constraint on money creation contributed to nervousness about inflation.’13 Orthodox economists, informed by the quantity theory of money, felt that monetary policy-makers should ensure that the quantity of money available in the economy did not contribute to inflation.

…

Arguing that ‘science is not a business’, Gary Pisano suggests that the VC model is especially problematic for science-based sectors characterised by complex and interdisciplinary knowledge bases.61
It is precisely due to the short-term nature of private finance that the role of public finance is so important in nurturing the parts of the innovation chain subject to long lead times and high uncertainty. While in some countries this has occurred through public agencies, such as DARPA and NIH (discussed above), in others patient finance has been provided through publicly owned development banks, otherwise known as state investment banks.
State investment banks (SIBs) have their historical roots in the monetary agreements of Bretton Woods and the reconstruction plans for Europe following World War II. The idea was to create an institution that promoted financial stability through a permanent flow of finance to fund the reconstruction plan and unleash agricultural production potential, thus preventing the deleterious effects that speculative private finance could have on post-World War II economic recovery. Following this rationale, the International Bank for Reconstruction and Development (IBRD) was created, providing its first loan to France in 1947.62 Other national development banks were founded around that time, such as KfW in Germany (1948),63 with the aim of channelling international and national funds to the promotion of long-term growth, infrastructure and modern industry.

…

It was the measures of the welfare state, such as free (or subsidised) education and healthcare, labour union-secured salaries and a progressive tax structure, along with complementary institutional innovations such as the credit system, unemployment insurance and mortgage guarantees, which made it possible for growing numbers of the population—including blue-collar workers—to aspire to a suburban home and the new lifestyle. Thus, the social safety net and suburbanisation, together with the Cold War, defined the optimal space for successful profitable innovation with dynamic, reliable and synergistic markets. On the global stage, complementary institutional innovations, such as the World Bank, the IMF, the GATT, the Bretton Woods agreement on the ‘gold dollar’, the UN (and, ironically, also the Cold War) stabilised international economies and trade, furthering the positive-sum game created between business and society.
A similar process of state-enabled convergence in innovation has occurred during every deployment period. Each technological revolution makes feasible a wide range of new interrelated infrastructures, production equipment and life-shaping goods and services.

Letter to Her Majesty the Queen, 22 July 2009, http://media.ft.com/cms/3e3b6ca8-7a08-11de-b86f-00144feabdco.pdf.
6. The NEC, founded under President William Jefferson Clinton, is distinct from the Council of Economic Advisers, founded in 1946 under President Harry Truman.
7. Lawrence Summers and Martin Wolf, ‘A Conversation on New Economic Thinking’, Bretton Woods Conference, Institute for New Economic Thinking, 8 April 2011, http://ineteconomics.org/video/bretton-woods/larry-summers-and-martin-wolf-new-economic-thinking.
8. Ben Bernanke, Chairman of the Federal Reserve, also stressed the intellectual debt of central bankers to the journalist, Walter Bagehot, in a lecture on the Federal Reserve’s response to the crisis. See Bernanke, ‘The Federal Reserve’s Response to the Financial Crisis’, Lecture 3, George Washington University School of Business, 27 March 2012, http://www.federalreserve.gov/newsevents/lectures/federal-reserve-response-to-the-financial-crisis.htm.
9. http://rwer.wordpress.com/2013/02/19/robert-lucas-on-the-slump.
10.

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Speech at the 14th IMF Annual Research Conference in Honor of Stanley Fischer, 18 November 2013. http://larrysummers.com/imf-fourteenth-annual-research-conference-in-honor-of-stanley-fischer.
Summers, Lawrence. ‘Why Stagnation Might Prove to Be the New Normal’, 15 December 2013, Financial Times. http://www.ft.com/cms/s/2/87cb15ea-5d1a-11e3-a558-00144feabdc0.html.
Summers, Lawrence and Martin Wolf. ‘A Conversation on New Economic Thinking’, Bretton Woods Conference, Institute for New Economic Thinking, 8 April 2011. http://ineteconomics.org/video/bretton-woods/larry-summers-and-martin-wolf-new-economic-thinking.
Taleb, Nassim Nicholas. Fooled by Randomness: The Hidden Role of Chance in Life and the Markets (London: Penguin, 2004).
Taleb, Nassim Nicholas.The Black Swan: The Impact of the Highly Improbable (New York: Random House, 2007).
Tarullo, Daniel K. ‘Statement by Daniel K. Tarullo, Member, Board of Governors of the Federal Reserve System before the Committee on Banking, Housing, and Urban Affairs, US Senate’, Washington DC, 11 July 2013. http://www.federalreserve.gov/newsevents/testimony/tarullo20130711a.htm.

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The purpose of the rest of the book is to answer the second.
Nobody doubts the crisis has had macroeconomic consequences, the difference being only over what they are and how long-lasting they will prove to be. But the view that the crisis had macroeconomic roots is controversial. Michael Dooley of the University of California at Santa Cruz and Peter Garber of Deutsche Bank, two of the authors of the influential ‘Bretton Woods II’ hypothesis (which explained and justified the fixed exchange-rate regimes adopted by many developing countries, notably China, as a sensible way of achieving rapid export-led industrial growth), reject the notion out of hand.6 They argue that the blame lies ‘with ineffective supervision and regulation of financial markets in the U.S. and other industrial countries driven by ill-conceived policy choices’.7
This chapter will argue, in opposition to this view, that understanding the underlying economics of the crisis is crucial.

And there's been enormous pressure, through the IMF and the World Bank, on poorer countries to adopt U.S.-style financial structures.
It's fairly simple to draw parallels from the brief financial history of the U.S. to a global scale. At the end of World War II, the international monetary system, known as Bretton Woods, was based on fixed exchange rates—the value of currencies were set relative to the U.S. dollar, and the U.S. dollar was set to a gold price of $35. The designers of the Bretton Woods system knew that fixed exchange rates were incompatible with fi-ee capital flows. International trade was encouraged by poHcy, but cross-border money flows weren't.
Strains began building on this fixed arrangement in the 1960s. Inflation rose, meaning that the dollar was effectively no longer worth the $35 an ounce that it was declared to be.

…

Inflation rose, meaning that the dollar was effectively no longer worth the $35 an ounce that it was declared to be. Also, Western Europe and Japan were busily catching up to U.S. productivity levels, meaning that their currencies were chronically undervalued relative to the doUar.^
Starting in the 1970s, the U.S. began pressing for liberalization of capital accounts worldwide. The classic Bretton Woods system encouraged trade flows, as did repeated tariff" reductions agreed on through the mechanism of the General Agreement on Tariffs and Trade (GATT). But capital flows had been pretty tightly restricted. The lead designers of the fixed exchange rate system, John Maynard Keynes firom Britain and Harry Dexter White from the United States, thought it important to insulate countries fi-om the pressures of international capital markets. Quaintly, the
220 After the New Economy
point of national economic policy was thought to be the encouragement of full employment, and, in the eyes of Keynes and White, free international capital movements would undermine such poUcies.

…

"Structural change in the new economy," speech to the National Gov-
ernors' Association, 92nd Annual Meeting, State College, Pennsylvania, July 11 <www.bog.frb.fed.us/BoardDocs/Speeches/2000/20000711 .htm>.
Greif, Mark (2001). "Learning to Love Globalization," The American Prospect, May 21 <www.prospect.org/print/V12/9/greif-m.html>.
Hansell, Saul, and Judith H. Dobrzynski (2000). "eBay Cancels Sale in Auction of Abstract Painting," New York Times, May 11, p. Al.
Helleiner, Erich (1994). States and the Reemergence of Global Finance: From Bretton Woods to the 1990s (Ithaca: Cornell University Press).
Henderson, David (1999). The MAI Affair: A Story and Its Lessons (London: Royal Institute of International Affairs).
Henry, David, and Michelle Conlin (2002). "Too Much of a Good Incentive," Business Week, March 4, pp. 38-9.
Henwood,Doug (1998). Wall Street: How It Works and for Whom (New York: Verso).
(2002)."Stiglitz: time to snuff the IMF?"

But the economy, the market, currency—we created these entities, and if they fail, we should look beyond trying to get them back up and running the way they were. We should fix them or toss them out and replace them.
When economists and politicians met in Bretton Woods, New Hampshire, in 1944, they faced a world in which war had devastated countrysides, cities, and economies. So they tried to devise solutions. They pegged currency to the American greenback and looked to the (terrible) twins, the International Monetary Fund and the World Bank, to get economies going again. The postwar era saw amazing recovery in Europe and Japan, as well as a roaring U.S. economy based on supplying a cornucopia of consumer goods. But the economic system that was created in Bretton Woods is fundamentally flawed because it is disconnected from the biosphere, the zone of air, water, and land in which we live. We cannot afford to ignore these flaws any longer.

…

Our home is the biosphere, the thin layer of air, water, and land where all life exists. And that’s it; it can’t expand. We are witnessing the collision of the economic imperative to grow indefinitely with the finite services that nature performs. It’s time to get our perspective and priorities right. Biocentrism is a good place to start.
The first Bretton Woods conference helped us devise solutions for the challenges of the time. Now we have new challenges for new times. It’s time for a Bretton Woods II.
The behemoth that wouldn’t stop growing
HAVE YOU NOTICED that we describe the market and the economy as if they were living entities? The market is showing signs of stress. The economy is healthy. The economy is on life support. Sometimes, we act as if the economy is larger than life. In the past, people trembled in fear of dragons, demons, gods, and monsters, sacrificing anything—virgins, money, newborn babies—to appease them.

It all began with a big conference in the Mount Washington Resort near Bretton Woods, New Hampshire, in July 1944. Over seven hundred delegates from forty-four countries—including Britain’s John Maynard Keynes (whose ideas later found new life in the wake of the 2008 global credit meltdown)—were in attendance.
World War II was drawing to a close. Governments were turning their attention to their shattered economies and how to rebuild them after two catastrophic wars, a global depression, a long escalation of protectionist tariffs, and some crazy currency devaluations. Everyone at the conference wanted to figure out how to stabilize currencies, get loans to war-ravaged countries for rebuilding, and get international trade moving again.
The outcome of this conference was something called the Bretton Woods Agreement. Among other things, it stabilized international currencies by pegging them to the value of gold (which lasted until 1971, when President Richard Nixon dropped the U.S. dollar from the gold standard).

…

But its most persistent legacy was the birth of three new international institutions: the International Monetary Fund (IMF) to administer a new monetary system; the International Bank for Reconstruction and Development (IBRD) to provide loans—today, the World Bank; and the General Agreement on Tariffs and Trade (GATT) to fashion and enforce trade agreements—today, the World Trade Organization (WTO). These three institutions guided much of the global reconstruction effort after the war; and during the 1950s their purpose expanded to giving loans to developing countries to help them industrialize. Today these three powerful institutions—the IMF, World Bank, and WTO—are the prime actors making and enforcing the rules of our global economy.
Up until the demise of the Bretton Woods monetary regulatory system in the early 1970s, it presided for three decades over what some have called the “golden age of controlled capitalism.”29 But by the 1980s, “controlled capitalism” had fallen to a revolution of “neoliberalism”—the deregulation and elimination of tariffs and other controls on international trade and capital flows. The neoliberalism movement was championed by British prime minister Margaret Thatcher and U.S. president Ronald Reagan, but was rooted in the ideas of Adam Smith.

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Bush stated that global trade expansion had been one of the “highest priorities of his administration.”32
Notice that the origins of today’s great global integration are at odds with one of its most widely promulgated myths: that globalization has emerged organically, born from fast Internet technology and the “invisible hand” of free markets. In truth, this global force owes its existence to a long history of entirely purposeful policy decisions, championed especially by the United States and Britain, dating to the waning days of World War II. Many who write about globalization see it as exploding suddenly in the 1970s or 1980s, thus missing the institutional groundwork laid first under Bretton Woods, pressed upon the developing world by its daughter institutions the IMF, WTO, and World Bank, and subsequently advanced by U.S. presidential administrations of both political parties ever since. Its foundations are now codified into decades of historical precedent and a plethora of free-trade treaties. They are engrained in generations of politicians and business CEOs, and were reaffirmed even during the turmoil of the 2008-09 global financial crisis.33 This megatrend has roots going back more than sixty years and is now a deep, powerful global force already shaping the twenty-first century economy.

But it would be replaced by an even larger proposal by the same Harry Dexter White to create a new organization: the World Bank.
THE ORIGINAL SIN AT BRETTON WOODS
The World Bank was founded in 1944 at the Bretton Woods conference, which had been set up by the soon-to-be victorious Allies to plan postwar economic cooperation. The Bank would provide long-term financing and expert advice to what would become known as “developing countries.” It would be the most powerful institution at the heart of the development community, which would include rich-country government aid agencies, international philanthropies, the United Nations and other international agencies, and the development experts advising all of the above. The same Bretton Woods conference also founded the International Monetary Fund (IMF), which would bail countries out of short-term financial crises.

…

The same Bretton Woods conference also founded the International Monetary Fund (IMF), which would bail countries out of short-term financial crises. Both the Bank and the Fund still have these powerful roles today.
A key moment in the hardening consensus for technocratic development was the approval at Bretton Woods of one particular clause in the Bank’s 1944 Articles of Agreement. Article IV, Section 10, was a “nonpolitical clause,” as it became known, which would make it easier to overlook unlovely autocrats among America’s anti-Soviet allies during the Cold War: “The Bank and its officers shall not interfere in the political affairs of any member; nor shall they be influenced in its decisions by the political character of the government of the member or members concerned. Only economic considerations shall be relevant to their decisions.”25
The nonpolitical clause had a political motivation in 1944. Ironically, this motivation for Article IV, Section 10, was originally to allow support for the Soviet Union—then a wartime ally.

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Such loans subject to such an expert committee “will be based on more careful studies of their utility than has ever been true with most private investments made to foreign countries.” This made clear “the necessity for selecting the most able men to manage the Bank.” The Bank “should also have the authority to send the experts into the field.”32 When White as Morgenthau’s deputy became the key American decision-maker at Bretton Woods, White’s original 1941 draft became the basis for the Article IV, Section 10, nonpolitical clause for the World Bank.
Harry Dexter White died in 1948, just as the World Bank began operations. But White had a former Harvard graduate school classmate and lifelong friend—Lauchlin Currie—to carry on his technocratic legacy at the World Bank. Lauchlin Currie had enthusiastically supported all of the Latin American and World Bank initiatives as Roosevelt’s chief White House economist since 1939.33
The irony, of course, is that the article against politics made it easier to use the Bank to pursue politics.

Under powerful public pressure, such measures for undermining democracy were restricted under the Bretton Woods system established after World War II. The Great Depression and the war aroused radical democratic currents, taking many forms, from the antifascist resistance to working-class organization. These pressures made it possible—and from a different point of view, necessary—to permit social democratic policies. The Bretton Woods system was presumably designed in part for that purpose, with the understanding that capital controls and regulated currencies would create a space for government action responding to public will—for some measure of democracy, that is. Keynes considered the most important achievement of Bretton Woods to be establishment of the right of governments to restrict capital movement. In dramatic contrast, in the neoliberal phase that followed, the U.S.

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Furthermore, “the growth of labor, capital, and total factor productivity have all fallen precipitously since the 1960s in the OECD [Organisation for Economic Co-operation and Development] countries.”11
In brief, the twenty-five years of economic sovereignty, state-coordinated economic growth, and capital controls under the Bretton Woods system led to better social and economic results than the following twenty-five years of neoliberalism, by just about every relevant measure, and by significant margins. It is important to stress that the results include social indicators. In the United States, for example, growth during the Bretton Woods period was not only the highest ever over a lengthy period, but was also egalitarian. Real wages closely tracked increase in productivity, and social indicators closely tracked growth. That continued until the mid-1970s, when neoliberal policies began to be imposed.

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But, he argued, thanks to “the natural disinclination which every man has to quit the country of his birth and connections,” and “fancied or real insecurity of capital” abroad, most men of property would “be satisfied with the low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign nations,” feelings that “I should be sorry to see weakened,” he added. We need not tarry on the force of their arguments, but the instincts of the classical economists were insightful.8
The post–World War II period conforms closely to these conclusions. There have been two phases. The first was under the economic regime established by the United States and Britain at Bretton Woods after the war, negotiated by Harry Dexter White for the United States and John Maynard Keynes for England. They shared the belief that economic sovereignty is a crucial factor in growth. The system they designed was based on capital controls and regulated currencies in order to protect economic sovereignty, and to permit state intervention to carry out social democratic measures. The regime lasted for about twenty-five years, and was extremely successful by historical standards.

So it functioned as the world’s reserve currency; that is, along with gold, it could be used to support the value of other nation’s money.
But World War I sapped Britain’s economic strength and destroyed its capacity to play the role of world creditor. As a result, the world had no new source of credit when the private banking sector collapsed in the 1930s. In July 1944, confident that Germany would be defeated, the United States and Britain hosted a forty-four-nation conference at Bretton Woods, New Hampshire, to design a new international monetary system. Keynes, who in 1919 had predicted the disastrous consequences of the reparations imposed on Germany by the Treaty of Versailles after World War I, headed the British delegation. He argued for an international currency to settle global trading accounts.
The Americans would not agree. The dollar was now king, and Washington had little interest in giving up the power and international leverage that it would provide.

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If the nation was not going to return to its historical protectionist policies, then it would have to increase the capacity of domestic production to compete. And if the dollar-to-gold connection would at some point have to be replaced in order for the world to have sufficient liquidity without an excessive burden on the United States, some new arrangement would have to be negotiated to succeed the Bretton Woods system. Given that the United States was still the world’s economic superpower, leading the noncommunist world to a new system should not have been a strenuous political challenge.
But the demands of empire and the hubris of American exceptionalism blinded the U.S. elite to the early signs of the country’s economic vulnerability. On the blithe assumption that nothing had changed, that the United States could continue to afford military adventure abroad and a perpetually rising good life for all at home, the march of folly resumed.

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The quantity of dollars, representing claims on U.S. production and wealth, grew faster than the capacity of the U.S. economy to produce. More dollars, increasing demand, and pursuit of the same supply of goods and services typically leads to inflation and a reduction in the value of a nation’s currency.
Foreign investors had had faith that the purchasing power of the dollars they held would remain stable because of the U.S. government’s Bretton Woods’s commitment to buy back dollars for gold at a fixed price. So at first they were content to hold on to the dollars, generally in the form of U.S. Treasury bonds, which would pay interest. There was, of course, never enough gold at Fort Knox to redeem all of the dollars. This was not a problem as long as the world had confidence in the U.S. pledge.
But as the Vietnam War’s escalation began to erode the dollar’s purchasing power at home, foreigners became nervous.

Many economic historians regard the abandonment of the gold standard as the most powerful tool implemented during the Great Depression, even more than the famed public works projects, although those were also helpful.
Instead of trying again to establish the gold standard after World War II, the international community set up the Bretton Woods system of fixed exchange rates with the dollar at the center. In principle, the dollar was linked to gold but only for official purchasers. Other countries, in turn, were obliged to fix their currencies to the dollar. Eventually, the system fell prey to inconsistencies of its own, particularly when inflation in the United States started making the dollar less and less attractive relative to gold, creating an unsustainable dynamic. The Bretton Woods regime finally shattered in 1973, breaking any last vestige of a link between paper currencies and commodities. The world had come full circle to the pure fiat money of the late Mongol rule in China.

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And even if it managed to avert default, a sharp rise in real interest rates would almost certainly lead in the long term to a massive shrinkage in currency demand.
THE POLITICAL ECONOMY IMPORTANCE OF SEIGNIORAGE
The development of much greater central bank independence in many countries over the past three decades has been perhaps the single most transformative change in global macroeconomic policy since the breakup of the Bretton Woods system of fixed exchange rates in the early 1970s. Therefore it is important that the central bank not be turned into a political punching bag in a currency phaseout, as its profits will sharply decrease. Aside from being a modest but nice source of income for the government, seigniorage revenue has an important political economy function in supporting central bank independence. It turns the central bank into a huge profit center that earns far beyond what it needs to operate, enabling it to remit the rest back to the national treasury.

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Lucas developed a theoretical framework showing that, under certain assumptions, activist monetary policy created random noise that made it more difficult for consumers to sort out movements in relative prices across diverse goods from generalized inflation.
The late 1970s and early 1980s were perhaps the peak period of Friedman’s direct influence on monetary policy. His view that real-world activist monetary policy usually does more harm than good seemed to be utterly corroborated by blundering central bankers, who badly mishandled the 1970s breakup of the Bretton Woods system of fixed exchange rates, as well as the sharp concomitant rise in global commodity prices. The United States, which was supposed to make the US dollar the bedrock of the international financial system, was at the epicenter of the problem. Instead of maintaining a stable money supply and inflation rate, the Federal Reserve massively increased the money supply in the run-up to the 1972 presidential election, in part to stimulate growth and help incumbent US president Richard Nixon get re-elected.

International trade collapsed. International investment
came to comprise the American bankrolling of western Europe and to a far
smaller extent the British subsidy of its colonies and commonwealth. For
global markets, 1945 was year zero. Under the Bretton Woods system established after World War II — named after the location of its founding conference — international capital flows grew slowly, limited by exchange controls.
Intermittent balance of payments deficits in some countries were the main
force driving the flows. It was not until after the Bretton Woods arrangements
began to crumble that the growth in the financial markets began to head up
the graph.
The birth of the Big Swinging Dick
A brief history of the recent growth of the international markets will demonstrate why their power this past decade or so has been fuelled by the growth
of government.

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Those agreements — the Plaza Accord and the
Louvre Accord — hold one clue to effective management of the financial
markets. Broadly speaking, taming the global markets will involve international co-operation. But the existing framework for international economic
management is inadequate. The Bretton Woods system has broken down, and
nothing has taken its place. Ad hoc interventions by a handful of the industrialised countries will not be powerful enough to govern the international
financial markets. Even worse, they have neither clear aims nor political legitimacy.
The underlying problem was diagnosed by Lawrence Summers, then
number two at the US Treasury, at a conference called in 1995 for the 50th
anniversary of Bretton Woods. He said: ‘With the passage of the communist
threat an important adhesive binding industrial democracies to each other
and their allies in the developing world has been lost’. The dissolution of the
Globalism and Globaloney
185
security glue means there is less need to co-operate and indeed there has
been less co-operation.

…

Nor is it generally capital
spending that is expected to generate a future return, but rather current expenditure on everyday services. The payments on the borrowing will depend
on tomorrow’s taxpayers financing them instead of today’s.
This pattern of borrowing in the international capital markets is a phenomenon dating from the 1970s. International capital flows grew at a steady
pace for the first quarter century after the post-war Bretton Woods confer-
The Weightless World
174
ence in the summer of 1945, and the ‘offshore’ Euro-market for short-term
lending and borrowing on a large scale was well-established by the mid-1960s.
But the great leap forward stemmed from the OPEC oil crisis. The mainly
Arab members of the Organisation of Petroleum Exporting Countries decided in 1973 as a result of the Middle East war to exercise their muscle by
quadrupling the price of oil.

pages: 443words: 98,113

The Corruption of Capitalism: Why Rentiers Thrive and Work Does Not Pay
by
Guy Standing

But corporations and financiers have used their new power to induce governments and supranational financial institutions to build an infrastructure that favours their interests.
Aided by the neo-liberal economics community, they have constructed a global framework of institutions and regulations that enable elites to maximise their rental income. It is anything but a ‘free market’.
FROM BRETTON WOODS TO CRONY CAPITALISM
In 1944, forty-four allied nations met at Bretton Woods, New Hampshire, in the USA to set up a trio of global institutions. The World Bank was established to rebuild capitalism, the International Monetary Fund (IMF) to maintain economic stability, and the General Agreement on Tariffs and Trade (later to become the World Trade Organization) to liberalise trade.
The World Bank and the IMF, both based in Washington DC, helped Western Europe recover, and then turned to developing countries.

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THE GLOBAL ARCHITECTURE OF RENTIER CAPITALISM
The Great Transformation was built by national bureaucracies answerable to national politicians and financiers. But, after the first phase collapsed in the 1930s, bankers were so discredited that when it came to creating the institutions for managing economic issues for the post-1945 era, President Franklin Roosevelt and others excluded all bankers (except one who was regarded as tame) from the Bretton Woods negotiations of 1944. It was only when the Global Transformation took off in the 1970s that bankers and financiers became dominant again. They have played an increasing role in shaping the global economy, largely built by international bureaucracies based mainly in Washington DC and in Geneva.
Geneva has been a centre of the governance of globalisation, and its shifting physical architecture has symbolised the changing character of global capitalism.

…

The number of UNHCR staff worldwide has almost doubled since 1995 to over 9,300, while IOM now employs 8,400, nearly eight times as many as in 1995. It is symbolic that, on the edge of Geneva airport, a compound for private jets belonging to some of the world’s plutocrats abuts cramped temporary accommodation for a growing number of asylum seekers.
On the other side of the Atlantic, in Washington DC, the Bretton Woods agencies have devoted considerable resources to their neo-liberal project. In 2015, the World Bank directly employed over 9,000 staff, a 50 per cent increase since 1995. It and the IMF have channelled huge amounts of money and technical assistance towards liberalising the global economy, through structural adjustment strategies in developing countries, shock therapy in ex-communist countries and supply-side economics in OECD countries.

pages: 346words: 90,371

Rethinking the Economics of Land and Housing
by
Josh Ryan-Collins,
Toby Lloyd,
Laurie Macfarlane,
John Muellbauer

Discussion of more recent times tends to focus on England, as housing markets and policies have varied widely across the nations of the UK, particularly since devolution around the turn of the millennium.
2 A bushel is an old unit of volume which was used mostly for agricultural products such as wheat.
3 The Bretton Woods system was developed at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire, from 1 to 22 July 1944. The major outcome of the Bretton Woods conference was the introduction of an adjustable pegged foreign exchange rate system whereby all currencies were linked to the US dollar which, in turn, was made convertible to gold at a fixed price. The conference also saw the creation of two global institutions that still play important roles today – the International Monetary Fund (IMF) and the World Bank.

…

Figure 4.1 New houses built by tenure (United Kingdom) (source: Office for National Statistics, 2016a)
Figure 4.2 Trends in tenure type from 1918 to 2013 (Great Britain) (%) (source: Office for National Statistics, 2016b; figures for 1918 and 1939 are for England and Wales only)
Post-war Britain – along with much of the developed world – enjoyed high levels of economic growth, moderate rates of inflation and full employment. Economic policy making was dominated by Keynesian thought (see Box 4.3) and the pursuit of bold social reforms such as the establishment of the welfare state, the nationalisation of the railways and the creation of the National Health Service. This period is often described as the ‘Golden Age of Capitalism’, and lasted until the collapse of the Bretton Woods fixed exchange rate regime in 1971.3
In the mixed economy of the Keynesian era, state-sponsored house building by councils coexisted with development by private firms, and to a much lesser extent by non-profit housing associations. The years in which the state built most were also those in which the market built most, suggesting that state supply caused little if any crowding out of private investment.

…

Together, these changes created a major bias in favour of owner-occupation, and contributed towards the continued rise in homeownership in the 1970s and 1980s – against the headwinds of rising house prices.
4.4 1970 onwards: the emergence of ‘residential capitalism’
The 1970s was a period of huge change, socially, politically and economically. While an immediate shortage of housing was no longer a major concern following the large-scale building in the post-war era, the UK economy faced multiple challenges as the dynamics of the global economy were transformed following the collapse of the Bretton Woods system. These included runaway inflation, oil price shocks, high interest rates and increasing tensions between industry and trade unions. This ultimately led to the election of Margaret Thatcher as prime minister in 1979, along with the emergence of monetarism and a more market-orientated approach to social and economic policy (see Box 4.4). Seen in retrospect, the economic and political upheavals of the 1970s have overshadowed some of the dramatic changes to the housing landscape.

Free flow of capital, in contrast, would create what some international economists call a “virtual senate,” in which highly concentrated financial capital imposes its own social policies on reluctant populations, punishing governments that deviate by capital flight.19 The Bretton Woods assumptions largely prevailed during the “Golden Age” of high levels of growth of the economy and productivity, and extension of the social contract, through the 1950s and 1960s. The system was dismantled by Richard Nixon with the support of Britain, and, later, other major powers. The new orthodoxy became institutionalized as part of the “Washington consensus.” Its outcomes conform rather well to the expectations of the designers of the Bretton Woods system.
Enthusiasm for the “economic miracles” wrought by the new orthodoxy is ebbing, however, among the managers of the global economy, as the near disasters that have accelerated since financial flows were liberalized from the 1970s have begun to threaten the “domestic constituencies” as well as the general public.

…

V
The Zapatista Uprising
Major changes have taken place in the global order in the past quarter century. By 1970 the “affluent alliance” of the post-war years was running on to the rocks, and there was growing pressure on corporate profits. Recognizing that the United States was no longer able to play the role of “international banker” that had been so beneficial to US-based multinationals, Richard Nixon dismantled the international economic order (The Bretton Woods system), suspending the convertibility of the dollar to gold, imposing wage-price controls and an import surcharge, and initiating fiscal measures that directed states power, beyond the previous norm, to welfare for the rich. These have been the guiding policies since, accelerated during the Reagan years and maintained by the “New Democrats.” The unremitting class war waged by business sectors was intensified, increasingly on a global scale.

…

It helps bring about the “significant wage restraint” and “atypical restraint on compensation increases [that] appears to be mainly the consequence of greater worker insecurity” that so encourage Fed chair Alan Greenspan and the Clinton administration, sustaining the “economic miracle” that arouses awe among its beneficiaries and deluded observers, particularly abroad.
There are few surprises here. The designers of the post–World War II international economic system advocated freedom of trade but regulation of capital; that was the basic framework of the Bretton Woods system of 1944, including the charter of the lMF. One reason was the (rather plausible) expectation that liberalization of finance would impede freedom of trade. Another was the recognition that it would serve as a powerful weapon against democracy and the welfare state, which had enormous public support. Regulation of capital would allow governments to carry out monetary and tax policies and to sustain full employment and social programs without fear of capital flight, US negotiator Harry Dexter White pointed out, with the agreement of his British counterpart, John Maynard Keynes.

Nationalist proto-fascist movements sprouted in the most unlikely places, and propounded arguments bereft of a scintilla of sense. “Nightmare” did not register as hyperbolic; it was the banjax of the vanities.
The Winter of Our Disconnect
I remember when I first felt that chill shiver of recognition that the aftermath of the crisis might be suspended in a fugue state far worse than the somnolent contraction itself. I was attending the second meeting of the Institute for New Economic Thinking (INET) at Bretton Woods in New Hampshire in April 2011.2 There probably would have been better places to take the temperature of the postcrisis Zeitgeist and observe the praxis of the political economy than up in the White Mountains, but I had been fascinated by the peccadilloes of the economics profession for too long, and anyway had felt that the first INET meeting at Cambridge University in 2010 bore some small promise—for instance, when protestors disrupted the IMF platitudes of Dominique Strauss-Kahn in Kings great hall, or when Lord Adair Turner bravely suggested we needed a much smaller financial sector.

…

The range of economic positions proved much less varied than at the first meeting, and one couldn’t help notice that the agenda seemed more pitched toward capturing the attention of journalists and bloggers, and those more interested in getting to see some star power up close than sampling complex thinking outside the box. It bespoke an unhealthy obsession with Guaranteed Legitimacy and Righteous Sound Thinking. But, eventually, even the journalists and the bloggers sensed the chill in the proceedings. Here were a few contemporary responses:
University economists, of the sort gathered at Bretton Woods, are now under relentless pressure to conform to a narrow, established paradigm. Inexplicably most supporters of that paradigm also feel that the crisis confirmed its validity.3
The last great crash caused a revolution in economics. Why hasn’t this one? . . . None of those theories appears to have appreciably shaped the economic policy proposals coming from the White House or Congress, where lawmakers draw much of their economic inspiration from think tanks built on dogma . . .

…

For example, when the irrepressible Yves Smith asked Larry Summers about whether banking risks in the United States could not be helpfully diminished if its large institutions were run (read: compensated at the top) more like utility companies, he immediately aborted any effort at an intellectually honest answer by making it sound as if she were proposing to bring state socialism to banking. A man who reportedly earned millions for having advised hedge funds one day a week for a year shortly before serving in the Obama Administration (and who is quite likely, now that he’s out, to do so again), he ought to have been patriotic and intellectually honest enough to provide a real answer.6
The most interesting moment at a recent conference held in Bretton Woods, New Hampshire—site of the 1945 conference that created today’s global economic architecture—came when Financial Times columnist Martin Wolf quizzed former United States Treasury Secretary Larry Summers, President Barack Obama’s ex-assistant for economic policy. “[Doesn’t] what has happened in the past few years,” Wolf asked, “simply suggest that [academic] economists did not understand what was going on?”

The costs of the Vietnam War were very significant for the US economy, and extremely beneficial for its rivals. That tended to shift the world balance.
In any event, by the early 1970s, the US felt that it could no longer sustain its traditional role as—essentially—international banker. (This role was codified in the Bretton Woods agreements at the end of the Second World War, in which currencies were regulated relative to one another, and in which the de facto international currency, the US dollar, was fixed to gold.)
Nixon dismantled the Bretton Woods system around 1970. That led to tremendous growth in unregulated financial capital. That growth was rapidly accelerated by the short-term rise in the price of commodities like oil, which led to a huge flow of petrodollars into the international system. Furthermore, the telecommunications revolution made it extremely easy to transfer capital—or, rather, the electronic equivalent of capital—from one place to another.

…

He recognized that US dominance of the global system had declined, and that in the new “tripolar” world order (with Japan and German-based Europe playing a larger role), the US could no longer serve—in effect—as the world’s banker.
That led to a lot more pressure on corporate profits in the US and, consequently, to a big attack on social welfare gains. The crumbs that were permitted to ordinary people had to be taken away. Everything had to go to the rich.
There was also a tremendous expansion of unregulated capital in the world. In 1971, Nixon dismantled the Bretton Woods system, thereby deregulating currencies. That, and a number of other changes, tremendously expanded the amount of unregulated capital in the world, and accelerated what’s called the globalization (or the internationalization) of the economy.
That’s a fancy way of saying that you export jobs to high-repression, low-wage areas—which undercuts the opportunities for productive labor at home. It’s a way of increasing corporate profits, of course.

…

They were, of course, correct, and Soros is correct insofar as he reiterates that view.
On the other hand, he also makes the common assumption that the market system is spreading, which just isn’t true. What’s spreading is a kind of corporate mercantilism that’s supported by—and crucially relies on—large-scale state power. Soros made his money by financial speculations that become possible when telecommunications innovations and the government’s destruction of the Bretton Woods system (which regulated currencies and capital flow) allowed for very rapid transfers of capital. That isn’t global capitalism.
As we sit here, the World Economic Forum is being held in Davos, Switzerland. It’s a six-day meeting of political and corporate elites, with people like Bill Gates, John Welch of GE, Benjamin Netanyahu, Newt Gingrich and so on.
The companies represented at this forum do something like $4.5 trillion worth of business a year.

Available as a free download from http://visar.csustan.edu/aaba/publications.html.
Association for Accountancy & Business Affairs, http://aabaglobal.org. Publishes Accountancy Business and the Public Interest, a peer-reviewed free journal. See http://visar.csustan.edu/aaba/aabajournalpage.html.
Bretton Woods Project. Established by British NGOs in 1995, BWP serves as a networker, information-provider, and watchdog to scrutinize and influence the World Bank and International Monetary Fund. Its newsletter, Bretton Woods Update, is available at www.brettonwoodsproject.org/update/index.shtml.
Offshore Watch. Web site for researchers into corruption and offshore affairs: http://visar.csustan.edu/aaba/jerseypage.html.
Tax Justice Network, www.taxjustice.net/cms/front_content.php?idcat=2www.tax justice.net.

The offshore economy began to emerge as a significant feature in the 1960s when huge volumes of petrodollars started to accumulate in Europe. The globalization of the financial system was catalyzed by a variety of factors, most notably liberalization of financial transactions through the removal of international exchange controls, the demise of the fixed-rate exchange mechanisms conceived at Bretton Woods in 1944, the extensive deregulation of financial markets during the 1980s, and the emergence of new communication technologies that put money transfers into effect at the click of a mouse.
The huge expansion of the financial services industry in the 1980s and 1990s saw the number of offshore tax havens increase from twenty-five in the early 1970s to seventy-two by the end of 2005.17 More countries are lining up to create their own offshore finance centers.

When Alan Greenspan wrote his gold-standard diatribe in 1966, he was not referring to the then-current Bretton Woods arrangement.5 He was discussing the pre-1914 international gold standard. Whether one lived in Hungary or California, the national currency could be redeemed for a fixed amount of gold. The people could decide for themselves if they trusted their government. They also had to live with strict limits on credit: it was a world with little sympathy (or, at least, little money) for those who were down on their luck. And it was not a world for mad financial conquest.
4 John Lukacs, A New Republic: A History of the United States in the Twentieth Century (New Haven, Conn.: Yale University Press, 2004), p. 425.
5 There are calls today for a return to a Bretton Woods gold standard. This is posed as an agreement that worked for nearly 30 years (1944–1971).

…

Coombs, The Arena of International Finance (New York: Wiley-Interscience,
1976), p. 71.
8 Richard Timberlake, Monetary Policy in the United States: An Intellectual and Institu
tional History (Chicago: University of Chicago Press, 1993), Table 21.1, p. 328. 9 Ibid., Table 21.2, p. 330. Reserve requirements of “central reserve city banks” as a percentage of deposits were lowered from 26 percent in 1948 to 16½ percent by 1960. 10 Bremner, Chairman of the Fed, pp. 144–145.
The Bretton Woods Conference of 1944 instituted the “gold exchange standard.” The dollar served as monetary backstop for the world’s currencies. The dollar would remain pegged to gold at the value of 35 to the ounce. Balance would be preserved by the legal authority of foreign central banks. They could redeem their dollars for gold at that rate.
One reason that Americans were spending more was that they had spent so little.

…

We are in the wildest inflation since the Civil War.”46 After that climactic finale, a troop of singers and dancers burst into the room to stage the evening’s entertainment: “The Decline and Fall of the Entire World as Seen through the Eyes of Cole Porter.”47
On August 15, 1971, President Nixon announced the United States’s unilateral decision to no longer pay gold to foreign governments for dollars. He blamed speculators.48 He did not give blame where it was due: to the American people and, perhaps foremost, to the decision makers in the Oval Office, who had done a bang-up job of destroying the Bretton Woods agreement. At no time did Nixon acknowledge that the United States had committed the shameful act of default. Nixon also used this opportunity to place wage and price controls on practically every American. The land of the free and the brave was looking anything but. Most Americans were in favor of this initiative by the government—the same government that had shown neither the knowledge nor the backbone to avoid the financial chaos that now engulfed the free world.

For example, after China and Russia vetoed the Anglo-American bid to impose sanctions on the Zimbabwe president Robert Mugabe and some of his regime in July 2008, the US ambassador to the UN, Zalmay Khalilzad, stated that Russia’s veto raised ‘questions about its reliability as a G8 partner’.183 From late 2008 there was much talk of a new Bretton Woods, but any such agreement would require far more fundamental reform than the West has hitherto entertained. At present the Bretton Woods institutions - the IMF and the World Bank - are dominated by the Western powers. The US still has 17.1 per cent of the quotas (which largely determine the votes) and the European Union an additional 32.4 per cent in the IMF as of May 2007, while China had just 3.7 per cent and India 1.9 per cent.184 If these institutions are to be revived as a result of any new agreement, the West will have to cede a large slice of its power to countries like China and India.

…

Britain’s version was the international gold standard system which, prior to 1914, encompassed a large part of the world in some shape or form. In the interwar period, as Britain declined, this gave way to an increasingly Balkanized system based on currency areas, protected markets and spheres of interest. After 1945 the United States became the world’s leading power and the new system that was agreed at Bretton Woods, and further elaborated in the years that followed, was essentially an American creation, made possible by the fact that the US economy was responsible for over one-third of global GDP at the end of the war. That system only became truly global when China joined the WTO in 2001 and the former members of the Soviet bloc queued up to join the international system following the collapse of the Soviet Union.

His legacy is a financial architecture designed to blunt the potential for colonial exploitation by disintermediating lenders and sovereign borrowers—replacing that relationship with a collective institutional financial organization. Did Bretton Woods save the world from a revival of imperialism? Did it bring more nations into the fold of prosperity? Whether it did or not, it undeniably altered the way that nations interact with one another and with the capital markets.
By introducing the IMF and World Bank as lenders of last resort, it blunted the sharp needs for nations to negotiate terms that reduced sovereignty. One can always argue that this moved the world away from a free market for financial contracts and thus reduced capital market efficiency. So did Solon’s proclamation that Athenians could not contract on their personal freedom.
Even if Keynes had never written another book, his legacy as a true financial innovator would still be preserved in the Bretton Woods Agreement. It has served the world well over the decades that followed.

…

The agreement resulting from negotiations among twenty-nine allied countries at Breton Woods, New Hampshire, in July 1944, established for the first time an international financial architecture. The conference had echoes of a “World Economic Conference” proposed by Keynes in his 1933 article “The Means to Prosperity,” in which the goal of such a conference would be the establishment of common world currency and an institutional structure for managing it. Eleven years later, at Bretton Woods, Keynes was on hand to represent British interests as well as his global vision. He proposed a plan that essentially interposed an international institutional framework between debtor nations and their creditors.
While the final plan was not strictly the one offered by Keynes, it shared with it the basic structure. The key components of the system, the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (later, the World Bank), provided a new means for the international community of nations to deal with sovereign debt.

…

While Keynes may not have been the only architect of this new structure, he was certainly a major force for it—and his conviction that it was the right thing to do stemmed from his early experience with the Paris negotiations in 1919. Modern Greece owes Keynes at least a little bit of thanks for laying the foundation of a messy bailout, but one that at least preserves its integrity as a nation.
THE WORLD BANK
The second major institution created at Bretton Woods was a bank designed to finance growth. As we saw above, the global financial markets essentially created the world’s infrastructure. Regulating investor access to collateral, while desirable from a political perspective, affects the willingness to lend. In the wake of new rules about international lending, how would big projects get financed? The International Bank for Reconstruction and Development—which later became the World Bank—was set up to fill this potential funding gap.

Though they are not merely puppets of the rich countries, the Unholy Trinity are largely controlled by the rich countries, so they devise and implement Bad Samaritan policies that those countries want.
The IMF and the World Bank were originally set up in 1944 at a conference between the Allied forces (essentially the US and Britain), which worked out the shape of postwar international economic governance. This conference was held in the New Hampshire resort of Bretton Woods, so these agencies are sometimes collectively called the Bretton Woods Institutions (BWIs). The IMF was set up to lend money to countries in balance of payments crises so that they can reduce their balance of payments deficits without having to resort to deflation. The World Bank was set up to help the reconstruction of war-torn countries in Europe and the economic development of the post-colonial societies that were about to emerge – which is why it is officially called the International Bank for Reconstruction and Development.

…

This was supposed to be done by financing projects in infrastructure development (e.g., roads, bridges, dams).
Following the Third World debt crisis of 1982, the roles of both the IMF and the World Bank changed dramatically. They started to exert a much stronger policy influence on developing countries through their joint operation of so-called structural adjustment programmes (SAPs). These programmes covered a much wider range of policies than what the Bretton Woods Institutions had originally been mandated to do. The BWIs now got deeply involved in virtually all areas of economic policy in the developing world. They branched out into areas like government budgets, industrial regulation, agricultural pricing, labour market regulation, privatization and so on. In the 1990s, there was a further advance in this ‘mission creep’ as they started attaching so-called governance conditionalities to their loans.

…

Although greater competition from manufactured imports and more foreign ownership could … help the Korean economy, Koreans and others saw this … as an abuse of IMF power to force Korea at a time of weakness to accept trade and investment policies it had previously rejected’.28 This was said not by some anti-capitalist anarchist but by Martin Feldstein, the conservative Harvard economist who was the key economic advisor to Ronald Reagan in the 1980s.
The IMF-World Bank mission creep, combined with the abuse of conditionalities by the Bad Samaritan nations, is particularly unacceptable when the policies of the Bretton Woods Institutions have produced slower growth, more unequal income distribution and greater economic instability in most developing countries, as I pointed out earlier in this chapter.
How on earth can the IMF and the World Bank persist for so long in pursuing the wrong policies that produce such poor outcomes? This is because their governance structure severely biases them towards the interests of the rich countries.

Worse yet, Western economies could fall into the trap of what Jacques Rueff called “subsidizing expenditures that give no returns with money that does not exist,” a path which invariably leads to inflation. Even more disturbingly, such a path could conceivably lead to growing suspicion of the fiat monetary system, which, as Anatole Kaletsky indicates in Capitalism 4.0, has been the bedrock of the post–Bretton Woods economic miracle.
Obviously, Asia has neither of the above two problems, which helps explain why most investors are keener to increase their risk in the East while decreasing their risk in the West. But of course this does not mean that Asia does not offer investors challenges.
The First Challenge: Stepping into the Unknown
A cliché among professional investors is that the four most expensive words in the English language are “This time it’s different.”

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Importantly, the Federal Reserve was created in 1913, and by the 1920s bills or acceptances on New York (in US dollars) used as a means of financing international trade were as important as bills or acceptances on London (in sterling) had been before World War I. Second, the United Kingdom ceased to be a creditor nation due to the financial burden of the two world wars (1914–1918 and 1939–1945). Third, when the postwar monetary system was planned at Bretton Woods in 1944 and launched with the IMF and the World Bank as its core institutions, the system was built around the US dollar—not the pound sterling—as the key currency, with the dollar convertible to gold at a fixed price. Moreover, sterling’s reputation suffered significantly from the 30 percent devaluation of 1949 (although a number of other nations also devalued in line with Britain) and the subsequent exchange controls imposed within the sterling area.

…

Adding another US$101 trillion of stock market trading based on the World Federation of Exchanges statistics would give total annual financial trading, excluding bonds and other over-the-counter transactions, of roughly US$900 trillion. Using a turnover tax of 0.005 percent would yield US$45 billion, roughly equivalent to the US$50 billion of annual aid pledged to Africa.
Global public goods are currently funded by equity (based on the Bretton Woods system that allocates weighted voting quotas to participating institutions) or by direct national grants. These mechanisms are not sustainable. We need a global tax to fund global public goods. But for a turnover tax to work, it is vital that all of the G-20 countries agree to impose a single, uniform rate of, say, 0.005 percent to avoid a race to the bottom from the onset. This would put into place the module of fiscal standardization and tax mechanism that improves conditions for future coordination in monetary policy and financial regulation.

By 1965, the French President, Charles de Gaulle, was decrying the world’s dependence on the US dollar and calling for a return to a national gold standard, and in 1971 Switzerland and France each demanded redemption in gold of its central bank’s holdings of dollars. America, fearing a similar call from the Middle East, declared it would no longer redeem dollar holdings for gold, defaulting on its Bretton Woods obligations and leading to the collapse of the Bretton Woods system. The final link between national currencies and gold was thereby abolished.
The oil-exporting nations of the Middle East retaliated by cutting production and quadrupling the price of oil (resulting in the 1973 oil crisis), whilst other countries struggled to maintain the fixed exchange rates they had agreed at Bretton Woods. A decade of economic chaos ensued. By the end of the 1980s the current system had emerged, whereby the major trading currencies floated freely against each other. Minor currencies were either fixed informally against one of the majors or abandoned in favour of currency union.

…

Towards the end of the 1930s, economies in the West began to recover through government deficit spending: civic reconstruction in the US and re-armament in the UK and Europe. Half a decade later as the Second World War drew to a close, a new arrangement was agreed such that all national central banks would hold accounts at the US Federal Reserve Bank, and the Fed would settle payments between accounts, which were redeemable, if necessary, in gold. This was the Bretton Woods agreement. Nations agreed to manage their currencies to maintain a fixed exchange rate against the dollar, and America agreed to fix the dollar against gold. Maintenance of the Bretton Woods exchange rates shifted focus onto the flow of capital into and out of countries. To prevent these flows interfering with the fixed exchange rates, the UK used a combination of capital controls (to limit the outflows due to the acquisition of foreign assets), quantitative and qualitative restrictions on bank lending, and control of interest rates (to limit the availability and demand for domestic credit which could fuel imports).

Simultaneously, however, an inability or lack of desire to turn the more radical sides of these projects into hegemonic ones also had important consequences for the period of destabilisation that followed.42 While capable of generating an array of new and powerful ideas of human freedom, the new social movements were generally unable to replace the faltering social democratic order.
OUTMANOEUVRED
Just as the new social movements were on the rise, the economic basis of the social democratic consensus was beginning to fall apart. The 1970s saw surging energy prices, the collapse of the Bretton Woods system, the growth of global capital flows, persistent stagflation and falling capitalist profits.43 This effectively ended the basic political settlement that had supported the postwar era: that unique nexus of Keynesian economic policy, Fordist–corporatist industrial production and the broadly social democratic consensus that returned a part of the social surplus back to workers. Across the world, the structural crisis presented an opportunity for the forces of both the broad left and the broad right to generate a new hegemony that could resolve it.

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The production of inflation through wage rigidities and trade union power was not the only possible framing of the problem, and neoliberalism was not the only possible solution. Alternative interpretations were available, alternative answers possible; in the moment, no one knew what the way out would be.47 The neoliberal narrative of the crisis, for instance, plays down the role of banking deregulation by UK Chancellor Anthony Barber in the early 1970s and the breakdown of the Bretton Woods system. These deregulations sparked a surge in the monetary base and a subsequent surge in price inflation, and then wage inflation.48 In other words, an alternative narrative was possible in which the problem was not strong unions, but rather deregulated finance.
That the neoliberal story won out is in no small measure because of the ideological infrastructure that adherents to its ideas had constructed over decades.

…

In other words, neoliberalism was not a necessary outcome, but a political construction.52
While Keynesian approaches were eventually able to develop an explanation of stagflation, by then it was too late, and the neoliberal approach had taken over academic economics and the policy world. In short, neoliberalism had become hegemonic. The decade after 1979 saw Margaret Thatcher elected as the British prime minister, Paul Volcker appointed as chairman of the Federal Reserve, and Ronald Reagan elected president of the United States. The IMF and World Bank, facing identity crises after the breakdown of the Bretton Woods system, were rapidly infiltrated and converted into crucibles of the true neoliberal faith by the 1980s. France undertook a neoliberal turn during the Mitterrand administration in the early 1980s, and the major economies of Europe became bound by the neoliberal policies embodied in the constitution of the European Union. In the United States and UK, a wave of systematic attacks were launched against the power of labour.

The thinking at the time is perhaps best represented by an influential text by two eminent social scientists, Robert Dahl and Charles Lindblom, published in 1953. Both capitalism and communism in their raw forms had failed, they argued. The only way ahead was to construct the right blend of state, market, and democratic institutions to guarantee peace, inclusion, well-being, and stability.9 Internationally, a new world order was constructed through the Bretton Woods agreements, and various institutions, such as the United Nations, the World Bank, the IMF, and the Bank of International Settlements in Basle, were set up to help stabilize international relations. Free trade in goods was encouraged under a system of fixed exchange rates anchored by the US dollar’s convertibility into gold at a fixed price. Fixed exchange rates were incompatible with free flows of capital that had to be controlled, but the US had to allow the free flow of the dollar beyond its borders if the dollar was to function as the global reserve currency.

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Unemployment and inflation were both surging everywhere, ushering in a global phase of ‘stagflation’ that lasted throughout much of the 1970s. Fiscal crises of various states (Britain, for example, had to be bailed out by the IMF in 1975–6) resulted as tax revenues plunged and social expenditures soared. Keynesian policies were no longer working. Even before the Arab-Israeli War and the OPEC oil embargo of 1973, the Bretton Woods system of fixed exchange rates backed by gold reserves had fallen into disarray. The porosity of state boundaries with respect to capital flows put stress on the system of fixed exchange rates. US dollars had flooded the world and escaped US controls by being deposited in European banks. Fixed exchange rates were therefore abandoned in 1971. Gold could no longer function as the metallic base of international money; exchange rates were allowed to float, and attempts to control the float were soon abandoned.

…

The other was to gain enough foreign reserves to buy in the necessary means to support a stronger internal dynamic of economic growth.1
These reforms would not have assumed the significance we now accord to them, nor would China’s extraordinary subsequent economic evolution have taken the path and registered the achievements it did, had there not been significant and seemingly unrelated parallel shifts in the advanced capitalist world with respect to how the world market worked. The gathering strength of neoliberal policies on international trade during the 1980s opened up the whole world to transformative market and financial forces. In so doing it opened up a space for China’s tumultuous entry and incorporation into the world market in ways that would not have been possible under the Bretton Woods system. The spectacular emergence of China as a global economic power after 1980 was in part an unintended consequence of the neoliberal turn in the advanced capitalist world.
Internal Transformations
To put it this way in no way diminishes the significance of the tortuous path of the internal reform movement within China itself. For what the Chinese had to learn (and to some degree are still learning), among many other things, was that the market can do little to transform an economy without a parallel shift in class relations, private property, and all the other institutional arrangements that typically ground a thriving capitalist economy.

Though they are not puppets of the rich countries, the Unholy Trinity are largely controlled by the rich countries, so they devise and implement Bad Samaritan policies that those countries want.
The IMF and the World Bank were originally set up in 1944 at a conference between the Allied forces (essentially the US and Britain), which worked out the shape of postwar international economic governance. This conference was held in the New Hampshire resort of Bretton Woods, so these agencies are sometimes collectively called the Bretton Woods Institutions (BWIs). The IMF was set up to lend money to countries in balance of payments crises so that they can reduce their balance of payments deficits without having to resort to deflation. The World Bank was set up to help the reconstruction of war-torn countries in Europe and the economic development of the post-colonial societies that were about to emerge – which is why it is officially called the International Bank for Reconstruction and Development.

…

This was supposed to be done by financing projects in infrastructure development (e.g., roads, bridges, dams).
Following the Third World debt crisis of 1982, the roles of both the IMF and the World Bank changed dramatically. They started to exert a much stronger policy influence on developing countries through their joint operation of so-called structural adjustment programmes (SAPs). These programmes covered a much wider range of policies than what the Bretton Woods Institutions had originally been mandated to do. The BWIs now got deeply involved in virtually all areas of economic policy in the developing world. They branched out into areas like government budgets, industrial regulation, agricultural pricing, labour market regulation, privatization and so on. In the 1990s, there was a further advance in this ‘mission creep’ as they started attaching so-called governance conditionalities to their loans.

…

Although greater competition from manufactured imports and more foreign ownership could … help the Korean economy, Koreans and others saw this … as an abuse of IMF power to force Korea at a time of weakness to accept trade and investment policies it had previously rejected’.28 This was said not by some anti-capitalist anarchist but by Martin Feldstein, the conservative Harvard economist who was the key economic advisor to Ronald Reagan in the 1980s.
The IMF-World Bank mission creep, combined with the abuse of conditionalities by the Bad Samaritan nations, is particularly unacceptable when the policies of the Bretton Woods Institutions have produced slower growth, more unequal income distribution and greater economic instability in most developing countries, as I pointed out earlier in this chapter.
But how on earth can the IMF and the World Bank persist for so long in pursuing the wrong policies that produce such poor outcomes? This is because their governance structure severely biases them towards the interests of the rich countries.

My client told me at that moment he realized he would never see his gold coin again. Walking out of the bank he had only received in exchange a piece of paper saying the U.S. government was backing its value.
Control versus Live Free or Die
Now that citizens were not in control of the basic element that valued their money, it was easy for governments to control and regulate the currency markets. In 1944, The Bretton Woods (yes, in Bretton Woods, New Hampshire, the Live Free or Die state) agreement was signed, pegging 44 countries’ currency to the dollar. Since the dollar was tied to $35 for an ounce of gold, it essentially tied these other foreign currencies to gold. This is when the International Monetary Fund (IMF) was created. The bottom line was making the power of monetary policy across half of the planet to be set by a system of rules and regulations, all coming back to the basic premise that the U.S. dollar had a specific representation to the hard asset of gold.

…

You see, when another country got into trouble, they would have to devalue their currency against the dollar. If foreign governments doubted the United States’ ability to maintain the gold standard, they would express this by asking for the gold it was backed by. Called the gold window, it’s like a foreign country like Switzerland pulling up to the window and asking to cash in dollars for an equivalent amount of gold. Sounds like a good system. In fact, if signers of The Bretton Woods Agreement were confident in the United States, they would not need to use the gold window at all.
Well, the United States has never been good at keeping a balanced budget, even though we were the economic superpower at the time. The 1960s had some great economic times for the stock market, but the gold window was starting to get some cracks in it. There were attempts to defend the $35 price by putting a London Gold Pool together between several nations.

LONDON
1936
John Maynard Keynes ( 1 8 8 3 - 1 9 4 6 ) ,
B r i t i s h e c o n o m i s t and s t a t e s m a n , published his influential General Theory
in 1936: "I believe myself to be writing a
book which will largely revolutionise the
way the world thinks about economic
problems."
Keynes was a financial wizard who made Keynes shocked his Bloom
Keynes, meeting Harry Dexter W h i t e MIT Professor Paul Anthony at Bretton Woods, New Hampshire, in ( 1 9 1 5 - ) and his p o p u l a r 1944, helped frame the post-war inter-Economics (1948), made Ke
national e c o n o m i c s y s t e m based on the standard theory in the p fixed exchange rates and the creation of riod. Samuelson was the fir: the International Monetary Fund and the to win the Nobel prize in E< World Bank.
1970.
In the 1970s, Austrian economist Friedrich von Hayek (1899-1992) a i-M-rtf^^rtr l\/lil+rtr> Cria/JiYion /-1 Q-1 0 _ 0 I^H f r a a w ^ r l / o t i i rra\ tr\ 1 i From Marx to Keynes
Scientific Economics Comes of Age
The success of the marginal revolution is intimately associated with the professionalization of economics in the
last quarter of the nineteenth century.

…

In May 1942, Keynes's name was submitted to the king, nominating him to become Baron Keynes of Tilton, and in July he took his seat in the House of Lords. On his sixtieth birthday, Keynes was made High Steward of Cambridge, an honorary post. He thrived on the adulation and elitist status.
Near the end of the war, Keynes and his wife traveled to the United States to help negotiate a new international financial agreement. Keynes was one of the architects of the Bretton Woods agreement, which established a fixed exchange rate system based on gold and the dollar and created the International Monetary Fund (IMF) and the World Bank.
Two years later, he died of a heart attack at the age of sixty-two.
Keynes's Disdain for Karl Marx and Marxism
Let us now turn to Keynes's approach to economics. It should be noted at the outset that Keynes had serious reservations about the economics of both Adam Smith and Karl Marx.

…

Inter^t rates would fall to zero and mankind would reenter the Garden of Eden. In Keynes's mind, the gold standard severely limited credit expansion and preserved the status quo of scarcity. Thus, gold's inelasticity—which the classical economists considered its primary virtue—stood in the way of Keynes's paradise and needed to be abandoned in favor of fiat-money inflation (1951
[1931], 360-73). The Bretton Woods agreement was the first step toward removing gold from the world's monetary system. Keynes would undoubtedly be pleased to see gold playing such a moribund role in international monetary affairs in the twenty-first century.
In short, Keynes's goal was not to save Adam Smith's house, as his adherents contended, but to build another house entirely—the house that Keynes built. It was his belief that economists would live and work most of the time in Keynes's house, while using Smith's house occasionally, perhaps as a vacation home.

As Nicholas Crafts showed in a 2013 paper for Chatham House, the early leavers did much better in terms of GDP and employment than the stayers – and France, which suffered a lot from clinging so long to gold, played a role equivalent to today’s Germany by hoarding the stuff and also insisting on running large current-account surpluses.7
Although the desire for currency stability carried through into the early years of the European project, the global system of fixed exchange rates linked to the dollar (and thus to gold) set up after the 1944 Bretton Woods conference that established the International Monetary Fund (IMF) and the World Bank seemed sufficient for most countries. But over time, and especially in France, the perception was growing that this system gave the Americans some sort of exorbitant privilege. This was one reason why the European Commission first formally proposed a single European currency in 1962. By the end of the decade, the revaluation of Germany’s Deutschmark against the French franc in 1969 created fresh trauma in both countries, which turned into renewed worries when the United States formally abandoned its link to gold two years later.

…

Indeed, at a summit meeting of heads of government in Paris in December 1972, all nine national leaders, including the UK’s Edward Heath, signed up blithely not only to monetary union but also to political union by 1980. A last-minute attempt by the Danish prime minister to ask his colleagues exactly what was meant by political union was ignored by the French president, Georges Pompidou, who was in the chair.8
It was the final collapse of Bretton Woods, followed by the Arab-Israeli war and oil shock and then by the global recession of 1974–75, that upset most of these ambitious plans. Yet by then West Germany, always on the look-out for greater currency stability, had already set up a system linking most of Europe’s currencies to the Deutschmark, swiftly dubbed the “snake in the tunnel”. The idea was to set limits to bilateral currency fluctuations, enforced by central-bank intervention.

…

The idea was to set limits to bilateral currency fluctuations, enforced by central-bank intervention. However, it turned out that the snake had only a fitful and unsatisfactory life. The UK signed up in mid-1972, only to be forced out by the financial markets six weeks later. Both France and Italy joined and left the snake twice. Devaluations within the system were distressingly frequent.
By 1978 there was still no sign of a general return to the Bretton Woods system of fixed exchange rates. So Europe’s political leaders came up with the idea of creating a grander version of the snake in the form of a European Monetary System (EMS). The EMS was mainly the brainchild of the French president, Valéry Giscard d’Estaing, and the German chancellor, Helmut Schmidt, although the president of the European Commission, Roy Jenkins, acted as midwife. In March 1979, the EMS came into being.

Conversely, explicit or implicit interest rate targeting smoothed short-term rate volatility after the Fed was created in 1913 and the gold standard was abandoned in 1933. Following centuries of flat long-term price levels, with inflation followed by deflation, in the 1900s inflation became higher, less stable, and more persistent. Inflation risks began to dominate real risks, especially after the end of the postwar Bretton Woods regime in 1971 (which finalized the shift to fiat money) was followed by large fiscal deficits, productivity slowdown, and two oil crises. The economic costs of high and unstable inflation became apparent during the miserable decade following the Bretton Woods breakdown. The Great Disinflation began soon after Paul Volcker became the Fed chairman in 1979 and continued for over two decades as inflation expectations fell and became increasingly well anchored. Cochrane (2008b) used this history to explain the 2005 “conundrum” of low and/or falling bond yields during a period of Fed tightening.

…

The period since 1983 coincides with the benign Great Moderation period, suggesting that carry trades may have had exceptional tailwinds behind them. However, performance seems to be nearly as good for the preceding 30 years. Lustig–Verdelhan (2007) make available simulated carry-ranked portfolio returns going back deep into the Bretton Woods regime when most exchange rates were fixed, with occasional devaluations. They sort a broad and growing country set into eight portfolios, with only annual rebalancing. Applying my top-three, bottom-three weighting to their carry-ranked portfolios, I find a 0.51 SR for 1953–1982. Other sources also document positive carry returns for the post-Bretton Woods period before 1983. Over all these windows, currency carry provides better risk-adjusted returns than static asset class premia in equities or fixed income.
Figure 13.3. Average excess returns of G10 carry-ranked single-currency portfolios, 1983–2009.

…

However, during this period the high yields attracted capital and caused currency appreciation, while the feared inflation did not materialize. Carry strategy profits were not riskless, however; during financial crises the high-yielders suffered and the yen served as a valuable safe haven (see Chapter 13).
The near-monotonic link between average returns and average yields in Figure 3.11 is not evident if I redo the analysis with available G8 data since 1971 (when the Bretton Woods system collapsed); the high-yielding British pound and Australian dollar earned average returns similar to those of the low-yielding Swiss franc and Japanese yen. However, this approach only looks at long-run average yields to determine the results from holding static positions for decades; more dynamic currency carry strategies did make money between 1971 and 1989 as well as thereafter. Still, it is fair to say that the currency carry strategy benefited from tail winds in the 1990s and 2000s.

The United States has been able to use its political dominance since World War II to develop, in an often haphazard or self-defeating way, a globally integrated economy in which its businesses are dominant and have privileged access to key markets and resources.
Schematically, in the postwar era we can see that the American empire has ruled through two international regimes: the Bretton Woods system, and what Peter Gowan calls the “Dollar–Wall Street regime.”12 Bretton Woods fixed international currencies to the gold standard in order to prevent destabilizing price fluctuations and enable an international economy to develop. The International Monetary Fund was the key institution set up to manage this global system and adjust currency prices based on a cooperative arrangement. Of course, the United States dominated, but it ruled in what might be called a collegiate fashion, taking the bulk of responsibility for the world system while expecting allied states also to participate in the global administration of markets, currencies, contracts, and property.

…

Instead They Caused a Tragedy,” Guardian, September 16, 2009.
6“A Gag Too Far,” Index on Censorship, October 14, 2009.
7Mark Sweney, “Bank Drops Lawsuit against Wikileaks,” Guardian, March 6, 2008; “Wikileaks Given Data on Swiss Bank Accounts,” BBC News, January 17, 2011; “WikiLeaks to Target Wealthy Individuals,” Daily Telegraph, January 17, 2011.
8Yochai Benkler, “A Free Irresponsible Press: Wikileaks and the Battle over the Soul of the Networked Fourth Estate,” Harvard Civil Rights-Civil Liberties Law Review 46 (2011); Lisa Lynch, “‘We’re Going to Crack the World Open’: Wikileaks and the Future of Investigative Reporting,” Journalism Practice 4: 3 (2010)—Special Issue: The Future of Journalism.
9John Vidal, “WikiLeaks: US Targets EU over GM Crops,” Guardian, January 3, 2011.
10See Mariana Mazzucato, The Entrepreneurial State: Debunking Public vs Private Sector Myths (London/New York/Delhi: Anthem Press, 2013), Kindle loc. 2302–2320; and Leo Panitch and Sam Gindin, The Making of Global Capitalism: The Political Economy of the American Empire (London/New York: Verso, 2013), p. 288.
11https://wikileaks.org/tpp-ip2/pressrelease.
12Peter Gowan, The Global Gamble: Washington’s Faustian Bid for World Dominance (London/New York: Verso, 1999).
13Quoted in Leo Panitch and Sam Gindin, “Global Capitalism and the American Empire,” Socialist Register 40 (2004).
14Figure cited in Andrew G. Terborgh, “The Post-War Rise of World Trade: Does the Bretton Woods System Deserve Credit?” London School of Economics, Working Paper No 78/03, September 2003, available at lse.ac.uk.
15On the breakdown of Bretton Woods, see Fred L. Block, The Origins of International Economic Disorder: A Study of United States International Monetary Policy from World War II to the Present (Berkeley/Los Angeles: University of California Press, 1977). On the political significance of Washington’s adaptation to this trend, see Gowan, Global Gamble.
16On the convergence of austerity policies and financial interests, see Robert W.

…

In a 1945 US Department of State document, Saudi Arabia—a nation effectively constructed through the decisive intervention of the British Empire, US politicians, and oil companies—was deemed “a stupendous source of strategic power, and one of the greatest material prizes in world history.”51
Initially, the US strategic posture was to allow the empires to fold at their own pace, thus leaving them responsible for the deployment of military power and the maintenance of political order, while encouraging newly independent societies to adopt development strategies predicated on import substitution, in which countries would try to overcome their dependency on foreign imports by developing their own industrial base. As long as US capital was able to invest, the United States could gain access to these markets by other means than the “Open Door” that had been orthodoxy since the late nineteenth century.52 Within a developing global financial infrastructure underpinned by Bretton Woods, states were thus encouraged to develop markets that could be incorporated into a US-dominated world system.
As more regional states won independence, the US gradually took more responsibility for military deployment. For example, a major asset to the United States was the development of the “Baghdad Pact”—a treaty organization linking a series of regimes to the United Kingdom in a strategic military alliance.

There were five CFR members in the 1943 steering committee that planned the United Nations, and an $8.5 million grant from J. D. Rockefeller bought the land on which the United Nations’ New York headquarters stands.36
All eleven of the World Bank’s presidents since 1946—men who have presented themselves as missionaries to the poor—have been members of the CFR. (The exception was George Woods. And he was a trustee of the Rockefeller Foundation and vice president of Chase Manhattan Bank.)37
At Bretton Woods, the World Bank and IMF decided that the US dollar should be the reserve currency of the world, and that in order to enhance the penetration of global capital it would be necessary to universalize and standardize business practices in an open marketplace.38 It is toward that end that they spend a large amount of money promoting Good Governance (as long as they control the strings), the concept of the Rule of Law (provided they have a say in making the laws), and hundreds of anticorruption programs (to streamline the system they have put in place).

…

Several senior officers of the McKinsey Global Institute (proposer of the Delhi Mumbai Industrial Corridor) are members of the CFR, the Trilateral Commission, and the Aspen Institute.40
The Ford Foundation (liberal foil to the more conservative Rockefeller Foundation, though the two work together constantly) was set up in 1936. Though it is often underplayed, the Ford Foundation has a very clear, well-defined ideology and works extremely closely with the US State Department. Its project of deepening democracy and “good governance” is very much part of the Bretton Woods scheme of standardizing business practice and promoting efficiency in the free market. After the Second World War, when communists replaced fascists as the US Government’s Enemy Number One, new kinds of institutions were needed to deal with the Cold War. Ford funded RAND (Research and Development Corporation), a military think tank that began with weapons research for the US defense services.

The new rules of the game of international finance that were agreed upon at Bretton Woods recognized that the old gold standard had been far too rigid and the virtual paper standard of the nineteen-thirties far too unstable; a compromise accordingly emerged, under which the dollar—the new king of currencies—remained tied to gold under the gold-exchange standard, and the pound, along with the other leading currencies, became tied not to gold but to the dollar, at rates fixed within stated limits. Indeed, the postwar era was virtually ushered in by a devaluation of the pound that was about as drastic in amount as that of 1931, though far less so in its consequences. The pound, like most European currencies, had emerged from Bretton Woods flagrantly overvalued in relation to the shattered economy it represented, and had been kept that way only by government-imposed controls.

…

The influence of market forces cannot be allowed to lower or raise the price more than a couple of cents below or above the pound’s par value; if such wild swings should occur unchecked, bankers and businessmen everywhere who traded with Britain would find themselves involuntarily engaged in a kind of roulette game, and would be inclined to stop trading with Britain. Accordingly, under international monetary rules agreed upon at Bretton Woods, New Hampshire, in 1944, and elaborated at various other places at later times, the pound in 1964, nominally valued at $2.80, was allowed to fluctuate only between $2.78 and $2.82, and the enforcer of this abridgment of the law of supply and demand was the Bank of England. On a day when things were going smoothly, the pound might be quoted on the exchange markets at, say, $2.7990, a rise of $.0015 from the previous day’s closing.

…

Just such a disaster followed the classic devaluation of all time, the departure of the pound from the old gold standard in 1931—an event that is still generally considered a major cause of the worldwide Depression of the thirties.
The process works similarly in respect to the currencies of all the hundred-odd countries that are members of the International Monetary Fund, an organization that originated at Bretton Woods. For any country, a favorable balance of payments means an accumulation of dollars, either directly or indirectly, which are freely convertible into gold, in the country’s central bank; if the demand for its currency is great enough, the country may revalue it upward—the reverse of a devaluation—as both Germany and the Netherlands did in 1961. Conversely, an unfavorable balance of payments starts the sequence of events that may end in forced devaluation.

Let us now see how the disturbances of 1968 started gold down the road to the place it occupies in the world today.
s inflation gathered steam during the course of 1968, the goldbased Bretton Woods system of fixed exchange rates loomed as .an intolerable restraint on politicians struggling to finance rising costs of government. The result was renewed interest in gold among the public as a safe haven destined to fulfill the proverb that Herbert Hoover had thrown at President-Elect Roosevelt in 1933: "We have gold because we cannot trust Governments."
Yet governments were limited in what they could do if the value of their currencies in the foreign exchange markets were to remain rigidly fixed, as the Bretton Woods regime prescribed. Higher government spending tends to stimulate domestic demand, which often raises prices and sucks in imports, the very conditions that make people want to flee a currency and shift to countries with a more conservative style of managing their economic and financial affairs-or to gold.

…

Higher government spending tends to stimulate domestic demand, which often raises prices and sucks in imports, the very conditions that make people want to flee a currency and shift to countries with a more conservative style of managing their economic and financial affairs-or to gold. The more that governments tried to find wriggle room around the constraints of the Bretton Woods system, the more the public and the speculators followed Hoover's dictum and turned to gold as the ultimate hedge against the irresponsibility of governments.
Indeed, nobody was satisfied with the way conditions evolved. The creators of the postwar system had produced an artful design, but economic depression and deflation were the dominant influences on their work. The turbulent economic environment spawned by the overoptimism and aggressive governmental policies of the 1960s was still too novel for anyone to even suggest designing a replacement for Bretton Woods. Once the inflationary genie was out of the bottle, the system had no comfortable way to stuff it back in.
After 1968, inflation became a self-fulfilling prophecy that added momentum to the fundamental inflationary forces at work in the system.

…

Instead of a world where each nation stubbornly pursued its own self-interest, the United Nations was created to manage a world of international cooperation and harmony; unlike the League of Nations, the plans for the United Nations featured the enthusiastic participation of the United States.
The plans for a new international economic system were worked out by 730 delegates from 44 countries who gathered in the White Mountain resort of Bretton Woods, New Hampshire, in 1944. Most of the final design came from John Maynard Keynes, representing the British Treasury, and his counterpart, Harry White of the U.S. Treasury Department.* The scheme that Keynes and White concocted seemed like an obvious one for the times.
Instead of an international economy where each nation was at the mercy of its stock of gold, the new system made the U.S. dollar the centerpiece of the structure.

At the end of World War Two, American firms operating abroad were confronted with ‘discriminatory tax and labor laws, inability to withdraw profits, and the constant threat of expropriation’, notably in Europe.20
The Bretton Woods system centering on the IMF was meant to provide American capital (and capitals matching their accumulation conditions) with an integrated circuit of capital internationally, but it was unclear how to begin to implement currency liberalization, when it seemed that the British Empire might suddenly break apart. During the debate in the US Senate on Bretton Woods, the isolationist opponents led by Senator Taft wanted to insert a clause requiring that any IMF member wanting to use the Fund’s resources would have to remove all exchange restrictions first. The principal proponent of the new system, Senator Barkley, countered this demand by recalling that Britain had introduced the economic controls at a time when the country was ‘all that stood between the rest of the world and Hitler’ and by expressing his confidence that the British would do away with Sterling area controls in due course.

…

After the invasion of the Soviet Union and the full mobilization of the American war economy, however, US ambitions soared to a hegemonic plane, as in 1917–18. The prospect of the unconditional defeat of the Axis was coupled with the fear of a postwar Depression arising from the doubling of the productive capacity of the US economy. Atlantic unity was now subordinated to Roosevelt’s and Truman’s version of a new American universalism as announced in the United Nations Declaration and the Bretton Woods Agreements (which at this time still included the plan for an International Trade Organization). The ‘Atlantic’ predicate of Roosevelt’s global design, first articulated in the 1941 Atlantic Charter, foresaw the incorporation of both the British Empire and the Soviet Union in an overarching Pax Americana.
It was not until the Chinese Revolution that a more realistic awareness of the limits of American power led to a revision of this strategy.

…

Thus, while General Motors head Sloan had followed the Du Pont representatives out of the BAC in 1935, a vice-president of the same firm in 1936 publicly declared that because of Hull’s trade policy he would vote for Roosevelt in the November election.72 As part of the same strategy, steps were taken towards monetary stabilization in the Atlantic area. The agreement with Britain of 1934, extended to France following the devaluation of the franc in 1936, prefigured the Bretton Woods system by stipulating mutual consultation in advance of parity changes as a means to facilitate the flow of trade and payments.73
However, the sphere-of-interest policy in international relations inherited from Hoover, still remained the overall framework of US foreign policy in the earlier New Deal period. As late as 1936, Roosevelt instructed his ambassador in Berlin to be alert to proposals coming from Hitler which might ensure peace, thereby allowing for German objectives abroad.74 Politically, Roosevelt persisted in the policy of non-interference in European affairs, until his ‘Quarantine the Aggressors’ speech of October 1937 announced that the strategy of accommodation with the Fascist powers had been abandoned.

As we have seen, one with the Saudis and OPEC provided that oil would be priced in dollars and that the Persian Gulf producers would recycle their profits by investing in U.S. government bonds and other assets. A second, even more informal, had foreign nations aided or protected militarily by the United States—Japan, Korea, and Taiwan—indirectly share those costs by buying and holding huge quantities of U.S. treasury and agency debt in their reserves and otherwise supporting the dollar. In still another, even less formal arrangement nicknamed “Bretton Woods II” in 2003, China and other high-saving nations that exported vast quantities of goods to the United States, unofficially collaborated by holding large central bank balances in U.S. treasury debt to support the dollar. But as we will see in chapter 7, that unofficial burden sharing is now in doubt, politically and financially. A lot of old international relationships are up in the air.
THE RISE OF FINANCE IN U.S.

…

In the 1980s, Taiwan, Korea, and especially Japan, dependent on the U.S. Pacific defense umbrella, generally cooperated with the United States in currency matters and kept much of their growing foreign currency reserves in U.S. treasury debt. In the late 1990s, as Chinese manufactures poured into the United States, Beijing’s mushrooming dollar accumulations became the focus. And in 2003, a trio of economists coined the term “Bretton Woods II” to describe a new benign state of affairs in which countries like Japan and China accumulated large reserves and recycled those reserves into treasury debt to provide low-cost financing for America’s huge current account deficits.38 These presumptions, in turn, led to a set of reassuring theories: that the United States was simply taking advantage of Asia’s excess savings, and that the huge U.S. current account deficit, being manageable for that reason, was harmless and not an economic and political vulnerability.39
The catalyst for a critical reassessment by foreign dollar-holders came in 2007 when the deterioration of the U.S. dollar, visible since 2002, began to accelerate, with the greenback tumbling roughly 10 percent against the euro and pound sterling in 2007 alone.

The plan, which is discussed in more detail in chapter 11, “Empire’s
Victory,” centered on opening national economies to unfettered access
136
PART II: SORROWS OF EMPIRE
by U.S. corporations and ﬁnancial institutions, which at that point were
unquestionably the most powerful on the planet. A set of three international institutions formed at U.S. initiative and known collectively as
the Bretton Woods institutions — the World Bank, the International
Monetary Fund, and the General Agreement on Tariffs and Trade (later
replaced by the World Trade Organization) — would be key players in
implementing the U.S. strategy.
Easy Credit
The Bretton Woods institutions played their roles well. As country after country emerged from colonialism, the World Bank encouraged
them to spur the growth of their economies by accepting foreign loans
to ﬁnance the purchase of goods and services from the industrialized
nations. Soon the new nations found themselves in a condition of debt
bondage to the very countries from which they had presumably gained
their independence.17
Corrupt rulers for whom the loans were a win-win proposition eagerly joined in the scam.

…

The less we are then hampered by
idealistic slogans, the better.”32
This was the real agenda, and the agencies of its implementation would
be the Bretton Woods institutions: the World Bank, the International
Monetary Fund (IMF), and the General Agreement on Tariffs and
Trade (GATT).33 In 1995, the World Trade Organization (WTO) replaced the less powerful GATT.
The difference between the public and private visions was similar to
the difference between the professed ideals of the U.S. Declaration of
196
PART III: AMERIC A, THE UNFINISHED PROJECT
Independence, which was a document intended to mobilize popular
support, and the reality of the U.S. Constitution, which institutionalized
the power and privilege of a ruling plutocracy. The United Nations had
mostly a symbolic moral authority. The Bretton Woods institutions had
the power to set rules and back them with economic sanctions.

…

The greater their freedom, the faster poverty is eliminated, the environment is restored, and the people of the world enjoy universal freedom,
democracy, peace, and prosperity.
Global integration, market deregulation, and privatization are inexorable and beneﬁcial historical forces that advance the wealth-creation
process. Economic globalization is inevitable, there is no alternative, and
resistance is futile. The winners will be those who adapt to the reality and
take advantage of its opportunities. It is the beneﬁcent mission of the
Bretton Woods institutions — the World Bank, International Monetary Fund,
and World Trade Organization — to facilitate the orderly advancement of
these processes. Only the misinformed or mean-spirited who would deny
the poor their opportunity for a better life oppose these institutions and
their sacred mission.
This story is commonly referred to as the Washington consensus, because it is propagated by the U.S.

A Note on Currency Crises
I often run into people who assert confidently that massive speculative attacks on currencies like the British pound in 1992, the Mexican peso in 1994–1995, and the Thai baht in 1997 prove that we are in a new world in which computerized trading, satellite hookups, and all that, mean that old economic rules, and conventional economic theory, no longer apply. (One physicist insisted that the economy has “gone nonlinear,” and is now governed by chaos theory.) But the truth is that currency crises are old hat; the travails of the French franc in the twenties were thoroughly modern, and the speculative attacks that brought down the Bretton Woods system of exchange rates in the early seventies were almost as big compared with the size of the economies involved as the biggest recent blowouts. And currency crises have been a favorite topic of international financial economists ever since the 1970s. In fact, it is one of my favorite topics—after all, I helped found the field.
The standard economic model of currency crises had its genesis in a brilliant mid-seventies analysis of the gold market by Dale Henderson and Steve Salant, two economists at the Federal Reserve.

…

Making the World Safe for George Soros
The very first real paper I ever wrote in economics was a piece entitled “A Model of Balance of Payments Crises,” written in 1977. It was a theoretical analysis of the reasons why attempts to maintain a fixed exchange rate typically end in abrupt speculative attacks, with billions of dollars of foreign exchange reserves lost in a matter of days or even hours. What I had in mind at the time were the attacks that brought down the Bretton Woods system in 1971 and its short-lived successor, the Smithsonian agreement, a year and a half later. It seemed to me then that the main interest of the paper would be historical; I did not expect to see attacks of that scale and drama again.
Based on a talk at the Group of 30, London, April 1997.
Luckily, I was wrong. I say “luckily,” because as the founding father of what has long since become the academic industry of speculative attack theory, my citation index goes up every time another currency crisis materializes, trailing its tail of economic analyses and rationalizations.

…

Then you will be a serene floater: You will believe that freeing your currency from the shackles of a specific exchange rate target, so that you can get on with the business of pursuing full employment, is unambiguously a good thing. This was the view held by many economists in the late 1960s and early 1970s; indeed, I remember as an undergraduate picking up from my teachers a definite sense that they regarded the whole Bretton Woods system as a barbarous relic, a needless straitjacket on macroeconomic policy.
You will be equally sure of yourself if you believe the opposite: that foreign exchange markets are deeply unreliable, dominated by irrational bouts of optimism and pessimism, while the monetary freedom that comes with floating is of little value. You will then be a determined fixer, seeking to lash your currency immovably to the mast—best of all, by creating a common currency shared by as many countries as possible.

So it is in Paper Promises, a brisk digest of changes in Western monetary policy over the last few centuries by the Economist writer Philip Coggan, and in Debt: The First 5,000 Years by the anthropologist and activist David Graeber, which situates the same stretch of modern history within the vast tidal shifts, across five millennia of Eurasian history, between monetary regimes founded on precious metals and those based on “virtual credit money.” In August 1971, Nixon suspended the convertibility of the US dollar into gold. Until then, foreign central banks had been entitled, under the terms of the Bretton Woods system established after World War II, to redeem dollar holdings at a rate of $35 an ounce. Whether or not this modified gold standard sponsored or merely accompanied the unprecedented expansion after 1945, it discouraged extravagance among international debtors. To sink too far into debt—in terms either of the national budget or the balance of accounts with trading partners—was to risk being sapped of gold.

…

To sink too far into debt—in terms either of the national budget or the balance of accounts with trading partners—was to risk being sapped of gold. For this reason among others, the first postwar decades saw steeply declining ratios of national debt to GDP across advanced economies. These years were also more or less free of the great, listing trade imbalances of the current era, which allow Americans, Spaniards, or Britons to buy so much more from foreigners than they sell to them.
The debt-restraining trends of the Bretton Woods settlement were not reversed until, in the late 1960s, the US began to live—and kill—considerably beyond its immediate means, borrowing enormous sums to cover Johnson’s Great Society and the Vietnam War. It was to avert a run on American reserves that Nixon first disconnected the circuit between paper and bullion. When dollar-gold convertibility was abandoned once and for all in 1973, borrowers and lenders began to ply a more insubstantial trade.

…

The inconceivability of such a policy is a mark not of any impracticability, but of the capture of governments by a financial oligarchy.
Although Paper Promises is essentially an extended piece of financial journalism, useful and efficient but captive to conventional wisdom, its treatment of the past 150 years nevertheless achieves a level of detail that Graeber must bypass. It’s from Coggan that one gets a picture of the workings of the pre-1914 gold standard, of interwar monetary chaos, and of the fragility of Bretton Woods. Yet in discussing the nature of money as the central reality of economics, both authors at times produce something like the illusion they are trying to dispel: as if currency, whether paper or metallic, were a thing apart from the social production and contestation of value. Both writers see 1971 as a watershed. It’s doubtful, however, that the abandonment of a residual gold standard was, even in monetary terms, the main event of the 1970s, or that it was decisive in bringing about the subsequent economic sea change.

Dylan Grice of Société Générale summed up the case for gold as a store of value:
A fifteenth-century gold bug who’d stored all his wealth in bullion, bequeathed it to his children and required them to do the same would be more than a little miffed when gazing down from his celestial place of rest to see the real wealth of his lineage decline by nearly 90 percent over the next 500 years.16
The Hotel New Hampshire
The Hotel New Hampshire, written by John Irving, the author of The World According to GARP, is populated with unlikely characters—Egg, Win, Iowa, Bitty Tuck, a Viennese Jew named Freud, and Sorrow, a dog repeatedly restored through taxidermy. In July 1944, a similarly dysfunctional group of politicians, economists, and bankers gathered in Bretton Woods, New Hampshire, at the Mount Washington Hotel, to establish the post-Second World War international monetary and financial order. The pivotal figures were John Maynard Keynes, representing the UK, and Harry Dexter White, representing the United States.
Selected as one of Time’s 100 most influential figures of the twentieth century, John Maynard Keynes was the author of General Theory of Employment, Interest, and Money and one of the fathers of modern macroeconomics.

…

A study concluded that: “On the basis of modern portfolio evaluation measures...Keynes was an outstanding portfolio manager ‘beating the market’ by a large margin.”17
Harry Dexter White, a descendant of Jewish Lithuanian Catholic immigrants, was an economist and a senior U.S. Treasury department official. White may have also been a Soviet spy, who passed confidential information about the negotiations to the Russians.
Bretton Woods took place against the background of a still raging brutal war, the rise of fascism, and the economic experience of the Great Depression. The focus was on establishing free trade based on convertibility of currencies with stable exchange rates. In the past, this problem was solved through the gold standard where the standard unit of currency was a fixed weight of gold. Under the gold standard, the government or central bank guaranteed to redeem notes upon demand in gold.

…

White rejected the proposal: “We have been perfectly adamant on that point. We have taken the position of absolutely no.”
The United States was the undisputed preeminent economic and military great power as well as the world’s richest nation and the biggest creditor. The British and the French, devastated by two world wars, needed American money to rebuild their economies. White’s view prevailed.
Bretton Woods established a system of fixed exchange rates where countries would establish parity of their national currencies in terms of gold (the peg). All countries would peg their currencies to the U.S. dollar as the principal reserve currency and, after convertibility was restored, would buy and sell U.S. dollars to keep market exchange rates within plus or minus 1 percent of parity (the band).
The U.S. dollar was to have a fixed relationship to gold ($35 an ounce).

In 1968, postwar
American expansion came to an end, and two years
later, the Japanese economy turned a corner: The
country was in trade surplus.
Since 1950, the yen had traded at 360 to the dollar
under the Bretton Woods system of fixed currencies.
By 1971, a trade imbalance of nearly $6 billion
between the two countries made the exchange rate
troubling to Washington: The strong yen meant
American products would be yet more expensive to
export, while the Japanese products increasingly
popular with American consumers would only get
cheaper. Nixon responded by devaluing the dollar;
under an agreement signed in December 1971, it
would trade at 308 yen. In Washington, this move was
part of a package of moves to dismantle the postwar
global-finance system—the abolition of the gold
standard, which led to the end of the Bretton Woods
system—that came to be known as “the Nixon
Shock.” At Tsukiji, it meant one thing: Overnight, the
cost of importing bluefin tuna into Japan fell by 15
percent.

With the end of the war, a lot of new investments that use these technologies were made, first for post-war reconstruction and then for the meeting of consumer demands pent up during wartime austerity.
There were also some important changes in the international economic system that facilitated economic development during the Golden Age.
The 1944 meeting of the Allies in the Second World War in the New Hampshire resort of Bretton Woods established two key institutions of the post-war international financial system, which are thus dubbed the Bretton Woods Institutions (BWIs) – the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), more commonly known as the World Bank.23
The IMF was established to provide short-term funding to countries in balance of payments crises (balance of payments is the statement of a country’s position in economic transactions with the rest of the world – see Chapter 12 for full details).

…

It has not been bettered since the 1980s, when state intervention was considerably reduced, as I shall show shortly. The Golden Age shows that capitalism’s potential can be maximized when it is properly regulated and stimulated by appropriate government actions.
1973–9: The Interregnum
The Golden Age started to unravel with the suspension of US dollar–gold convertibility in 1971. In the Bretton Woods system, the old Gold Standard was abandoned on the recognition that it made macroeconomic management too rigid, as seen during the Great Depression. But the system was still ultimately anchored in gold, because the US dollar, which had fixed exchange rates with all the other major currencies, was freely convertible to gold (at $35 per ounce). This, of course, was based on the assumption that the dollar was ‘as good as gold’ – not an unreasonable assumption when the US was producing about half of the world’s output and there was an acute dollar shortage all around the world, as everyone wanted to buy American things.

…

When the US interest rates doubled, so did international interest rates, and this led to a widespread default on foreign debts by developing nations, starting with the default of Mexico in 1982. This is known as the Third World Debt Crisis, thus known because the developing world was then called the Third World, after the First World (the advanced capitalist world) and the Second World (the socialist world).
Facing economic crises, developing countries had to resort to the Bretton Woods Institutions (the IMF and the World Bank, just to remind you). The BWIs made it a condition that borrowing countries implement the structural adjustment programme (SAP), which required shrinking the role of the government in the economy by cutting its budget, privatizing SOEs and reducing regulations, especially on international trade.
The results of the SAP were extremely disappointing, to say the least.